Benchmark and Financial Analysis Final report 3/2018 · 2018-04-10 · and...

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Benchmark and Financial Analysis – Final report

3/2018

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Table of contents 1. Introduction and executive summary ............................................................................................. 4

1.1. Objectives ................................................................................................................................ 4

1.2. Approach and methods of study ............................................................................................. 4

1.3. Results ..................................................................................................................................... 4

2. Introduction .................................................................................................................................... 5

3. Benchmarking of other projects...................................................................................................... 6

3.1. Technical benchmarking (topic 1) ........................................................................................... 7

3.1.1. Main elements considered for the technical benchmark ............................................... 7

3.1.2. Projects evaluated for the technical benchmark .......................................................... 11

3.1.3. Evaluation results of the technical benchmark ............................................................. 11

3.1.4. Technical cost benchmarking ........................................................................................ 19

3.2. Economical benchmarking (topic 2) ...................................................................................... 22

3.2.1. Main elements to be considered in the economical benchmark .................................. 22

3.2.2. Projects evaluated for the economical benchmark ...................................................... 24

3.2.3. Evaluation of the results of the economical benchmark .............................................. 25

3.3. Benchmarking results and issues to consider ....................................................................... 30

4. Issues to be considered regarding the financing of the FinEst Link project ................................. 31

4.1. Financial models and risk allocation ..................................................................................... 31

4.1.1. Project financed by public sector .................................................................................. 32

4.1.2. Privately financed project /PPP ..................................................................................... 35

4.1.3. Hybrid structures ........................................................................................................... 37

4.1.4. Financing and risk allocation in the investment and operation phase ......................... 37

4.1.5. Procurement model for partnering based contracting model ...................................... 40

4.2. Available funding for the project .......................................................................................... 41

4.2.1. Affordability and public funding sources ...................................................................... 41

4.2.2. Demand risk .................................................................................................................. 42

4.2.3. State aid issues .............................................................................................................. 43

4.2.4. Balance sheet treatment ............................................................................................... 43

4.2.5. Interest rate assumption ............................................................................................... 44

4.3. Structuring of the financing .................................................................................................. 45

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4.3.1. Project debt capacity ..................................................................................................... 45

4.3.2. Market capacity ............................................................................................................. 46

4.3.3. Sources of financing - Debt ........................................................................................... 46

4.3.4. Sources of financing – Junior and Equity financing ....................................................... 48

4.3.5. Grant financing .............................................................................................................. 48

4.3.6. Conlcusions regarding sources of financing .................................................................. 49

4.4. Issues to consider regarding FinEst link based on financing structure analysis .................... 49

5. Financial modelling ....................................................................................................................... 51

5.1. Business case description ...................................................................................................... 51

5.1.1. Traffic estimations ......................................................................................................... 51

5.1.2. User charges and other income sources ....................................................................... 53

5.2. Financial analysis assumptions .............................................................................................. 54

5.2.1. Schedule ........................................................................................................................ 54

5.2.2. Capital and investment expenditure ............................................................................. 55

5.2.3. Operational expenses assumptions .............................................................................. 55

5.2.4. Revenues ....................................................................................................................... 59

5.2.5. Inflation and interest rate ............................................................................................. 59

5.2.6. Financing assumptions .................................................................................................. 60

5.3. Results without grant financing ............................................................................................ 61

5.4. Results with grant financing .................................................................................................. 63

5.5. Results with grant and 100% public debt .............................................................................. 65

5.6. Results with 100% public debt and no grant......................................................................... 67

5.7. Results with grant and Public Private Partnership (PPP) -model .......................................... 68

5.8. Results with PPP model and no grant ................................................................................... 70

5.9. Commercially financiable project .......................................................................................... 71

5.10. Summary of financial and economic analysis ................................................................... 72

5.11. Issues to consider regarding FinEst link based on the financial feasibility analyisis ......... 74

6. Conclusions ................................................................................................................................... 75

7. Summary of results and issues to consider in further project phases .......................................... 77

7.1. Benchmarking results and issues to consider ....................................................................... 77

7.2. Financing model analysis and issues to consider .................................................................. 77

7.3. Financial feasibility of the project and issues to consider .................................................... 79

8. ANNEX 1 Indexing .......................................................................................................................... 80

9. ANNEX 2 Alternative timetable for fixed link ................................................................................ 81

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1. Introduction and executive summary

1.1. Objectives

The aim of this report is to provide

A. a technical and economic benchmarking with other comparable projects

B. describe aspects of project financing relevant to large infrastructure projects such as FinEst Link, and

C. to summarize results of the two other work packages in a financial model of the project.

The results of this study should facilitate the further development of the project taking into account practical issues from organizational, risk and financial perspectives.

In chapter 3, the results from the benchmark are discussed. In chapter 4, the results from the financial model are presented.

1.2. Approach and methods of study

Financial Advisory services Inspira and Rebel Group (Consultants) were appointed to prepare a benchmarking and financial analysis of FinEst Link. The Study comprises the Work Package 4 contents of the FinEst Link project.

The study has been prepared as a desktop study using the information that has been available from public sources, the project and other project Work Packages. The Consultants have prepared this memorandum solely for the FinEst Link project and the Consultants do not accept any responsibility for any errors or omissions and any liability arising from these.

1.3. Results

Results have been presented in the end of each of the study sections 3 - 5 and in the end of the report in a separate summary of results –section (section 7). Conclusions have been presented in section 6. A separate executive summary document has also been drafted containing the main contents and results of this study.

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2. Introduction

The Helsinki-Tallinn ferry line is one of the busiest in Europe. It is part of the North Sea - Baltic TEN-T Core Network Corridor. Helsinki is node of two TEN-T Core Network Corridors, the North Sea - Baltic and Scandinavian-Mediterranean. New Rail Baltica railway through the Baltic States is planned to become operative to Tallinn in 2026. Further integration of two metropolitan regions is a strategic objective in both countries.

The overall aim of the FinEst Link feasibility study project is to identify and seek long term solutions to meet the challenges related to the improvement of Helsinki-Tallinn link as part of the wider European TEN-T network. The fixed link as a core of the long-term strategy will be assessed in terms of improving multimodality, reducing CO2 emissions and exploiting benefits of digitalization in transport services.

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3. Benchmarking of other projects

The aim of this benchmark is to provide a point of reference for the project to which it can measure its performance. The problem is approached from two sides:

Topic 1. a technical perspective (section 3.1), and

Topic 2. an economical perspective (section 3.2).

The projects in the technical benchmark will be technically comparable railway tunnels and the projects in the economical benchmark will be infrastructure projects of comparable size, set-up and political and geographical environment (e.g. cross-border EU).

The projects to be benchmarked have been defined in consultation with FinEst Link. The structure of each benchmark contains three items: the main elements considered a list of projects included and the evaluation of these projects.

When comparing cost factors for major infrastructural works, a distinction can be made between Inherent, Structural1, Systemic and Realized costs – the so-called ISSR Framework. When in the feasibility phase, the benchmark should focus on the inherent cost factors, which can then still be changed easily and which will have the most important effects. These cost factors can be described as the “Fundamental business and technology choices and services” that should be provided for a proper benchmark. In this case this would mean all choices for why and how a certain type of infrastructure (in this case, a tunnel) is constructed. The answer to this question is strongly related to the choices for the service that is to be provided. As is understood, the FinEst Link should connect to the RailBaltica corridor, which will be constructed using TSI standards, the tunnel should also comply to this. This still leaves open choices on operating speeds, track gauge and loading gauge, train frequencies and total number of trains per day. Thus, this leaves open all possibilities with respect to the markets which will

1 It is noted here, that Structural cost factors have not much to do with the “civil engineering structures” of the project, but rather the more structural cost factors such as operating and supply chain foot print and the structural design.

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be serviced through this tunnel. For example higher train speed will increase the markets on either side of the tunnel which can be serviced within a 2or 3 hour travelling time. The costs for these choices and the benefits that can be created are to be regarded in combination. The benchmark will therefore focus on technical issues and demand on one side and on the economical choices made with other peer projects on the other side.

3.1. Technical benchmarking (topic 1)

When looking at the technical characteristics of a tunnel, two types of underwater tunnels can be identified: the immersed tunnel and the bored tunnel. In the first type of tunnel, tunnel sections are sunk into place from the water surface, which is usually done for shorter tunnels. For longer underwater tunnels such as the Channel Tunnel, tubes are bored into the soil. In the case of this feasibility study, a reference project in the form of a bored tunnel has been chosen for FinEst Link.

It is presumed, that the FinEst connection feasibility design is made with a clear demand profile in mind.

In this paragraph, first the main technical elements which have an effect on the project costs are defined in section 3.1.1. The four bored railway tunnels included in this technical benchmark are presented in section 3.1.2. Finally, the evaluation of these projects is given in section Error! Reference source not found..

3.1.1. Main elements considered for the technical benchmark

The main elements included in the technical benchmark are the major Inherent cost factors. These factors are split into three distinct categories: tunnel construction characteristics, rail equipment installed and tunnel specific equipment. Finally, an extra category is defined as “pre-project connections and demand” which describes the existing connections that will be replaced or competed with and demand expectations for the tunnels.

3.1.1.1. Tunnel construction cost factors When looking at the tunnel construction (TC) cost factors, their effect can be described as follows:

TC1 Length of the tunnel: a longer tunnel leads to increased tunneling costs, and also more tunnel and rail installations are needed to be able to operate the tunnel. Another issue might be that with longer tunnels, the construction and maintenance logistics can become more complicated. This can be significantly changed by using mid-tunnel access points. At the same time, the tunnel construction cost per meter might be reduced, because of economies of scale with longer tunnel. These evaluations should be part of a further investigation into this project, because currently they are not part of the evaluations of either logistics or costs.

TC2 Tunnel layout: the tunnel layout will determine tunneling costs, it is affected by the number of tracks needed. If just one track is needed, then the layout will be obvious, but there are numerous options for a two-track layout (e.g., two tubes, one tube with separating wall, one tube without separating wall, etc.). An issue with this is also the safety measures (What kind of trains use the tunnel – also those with inflammable or explosive materials? What does the scenario look like in case of fire? Where do the people go to in case of an emergency?) and also ventilation.

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TC3 Diameter of the tunnel: an increased diameter leads to increased tunneling costs. The necessary internal tunnel diameter is determined by the dynamic loading gauge needed to let the trains pass. Although Finland has a wider track gauge and larger loading gauge, for the FinEst project, this is in fact not much of an issue: When running with higher speeds (e.g. >200 km/h), the extra area needed for the larger loading gauge for Finnish rolling stock, can then be used by trains at higher speeds to reduce their air resistance.

TC4 The service tunnel: the tunneling costs will increase as an extra tube needs to be created. However, the life-cycle costs might decrease because of easier access for or benefits increased due to various reasons (maintenance, access etc.).

TC5 Crossovers between running tunnels or between running tunnels and service tunnel: In case of multiple running tunnels, these tunnels have to be regularly connected to supply a possibility for stranded passengers and personnel to reach the other tunnel. Also for maintenance purposes they are of use. Again, the tunneling costs will be increased when more crossovers are created. The distance between cross-overs is determined by (national) safety regulations.

TC6 Train crossovers between running tunnels: implementing possibilities for trains to cross over from one track to another will lead to increased tunneling costs. This will probably also increase the flexibility in operations of the tunnel (in case of maintenance or stranded trains) and the possibility to evacuate trains more easily (and thus has both benefits for operations and maintenance issues). It does however also create a risk, since a turnout is a derailment-risk. The exact cost of train crossovers these are determined by the tunnel lay out: in a single bore tunnel they are relatively cheap, in a multiple tunnel-lay out, they are expensive.

TC7 Emergency stations: installing emergency stations will lead to extra tunneling costs as they need more space than a standard tunnel. This will lead to an increased diameter and thus extra costs. This factor can be affected by safety regulations.

TC8 Type of geology: not only the type of geology will affect the tunneling costs, but also the amount of knowledge about the geology and the associated risks will have an effect on the project costs. For certain tunnel types (e.g. a single bore) a more thorough geological report has to be established than with multiple bore tunnels, since everything has to done right at once. The excavated soil-type also determines what can be reused as building material or how much environmental measures have to be taken in case landfills.

TC9 Construction methods: choosing a construction method will be based on several different factors. The most common drilling techniques are using a tunnel boring machine (TBM) and a combination of drilling and blasting. Choosing a combination of these activities and the number of TBMs will lead to a trade-off between construction time and construction cost.

TC10 Spoil material: the amount is defined by the aforementioned cost factors, such as tunnel diameter and length. The destination of this spoil material is also important as a sustainable easily available depot for this material (close to the tunnel excavation entrances, with a large capacity) will decrease the costs, and in a very optimal case provide benefits (e.g. creation of artificial land).

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It is estimated that following technical cost factors are hardly or not of influence or not very different for the benchmarked (projected) tunnels:

- depth of the bored tunnel (although an immersed tunnel has the advantage of not being as deep as the Gotthard Base Tunnel currently in service or Brenner and Mont d’ Albin tunnels which are currently in the construction phase.

3.1.1.2. Rail equipment cost factors In terms of rail equipment (RE) cost factors, some choices can also be made which will affect the project costs:

RE1 Loading gauge, track type and track width/gauge: the choice of gauge and track type has an effect on the rolling stock that can pass through the tunnel. A 4-rail track allowing both normal track gauge (1435mm) and the broad Finnish track gauge (1524mm) would increase costs but improve the usability. All benchmarked tunnels have 1435mm track gauge, but since the FinEst design standard currently only foresees one track gauge, there will be no cost differences because for.

It is presumed that ballastless track (track on a concrete base plate) will be installed because of the lower construction height and thus reduced tunnel diameter. It has been installed in all benchmarked tunnels.

With respect to the loading gauge, TSI compliant loading gauge is foreseen just like in all benchmarked tunnels. An interesting point is that for running at higher speeds, a larger tunnel diameter is necessary to reduce air pressure resistance for the fast trains. A large loading gauge for freight trains can thus function as a possibility for smaller loading gauge but faster passenger trains to use the extra room in the tunnel for the reduction of air resistance.

RE2 Communication systems for trains, maintenance crews, emergency personnel and control centers.

RE3 Traction power supply: choosing a certain electrification (voltage, frequency) will lead to a required number of substations and transformers, affecting the project costs.

RE4 Signaling: the signaling system installed will determine maximum capacity, headways and speeds.

3.1.1.3. Tunnel technical installation cost factors In terms of tunnel technical installations (TTI) a number of choices will need to be made:

TTI1 Lighting: the tunnel will require lighting for train operators and maintenance crews, but also in case of emergencies to indicate escape routes. More lighting leads to higher installation and power costs.

TTI2 Ventilation: a ventilation system will be needed, because of the length of the tunnel. Fresh air supply, managing air pressure differences due to running trains and managing air flow in case of fires and other incidents all belong to its tasks. This ventilation system will depend on many other cost factors such as the length of the tunnel, number of escape routes, etc.

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TTI3 Cooling: a cooling system will need to be able to control the heat generated by moving trains (mainly propulsion system, but also the air conditioning systems). Choosing such a system will affect the cost, but again there is a link with other cost factors such as length of the tunnel and the ventilation system chosen.

TTI4 Fire-fighting: one of the biggest risks in a tunnel is the possibility of a fire. Implementing a fire-fighting system will likely depend on safety regulations, but has an effect on many other cost factors such as ventilation, availability of a service tunnel, etc. It is strongly influenced by the choice if freight trains or trucks on the truck shuttle trains, with inflammable or explosive cargo are allowed to use the tunnel.

3.1.1.4. Pre-project connections and demand

Finally the pre-project connections and demand will have an effect on the cost of the tunnel:

PP1 Demand: the demand determines the train capacity that has to be operated which has an effect on both capital expenditure (CAPEX) and operational expenditure (OPEX) factors. Based on the proposed timetable it determines the amount of tracks needed and affects the tunnel layout, diameter and equipment installations.

PP2 Existing connections: This focusses on the existing markets: what kind of competition is there before the tunnel projects? What are the existing connections?

PP3 Capacity: the capacity is related to the demand, the train capacity and the frequency of the services depends on the demand. Combining the number of trains with the operating speed will determine the tunnel capacity needed. From here cost factors such as tunnel layout can be determined.

PP4 Operational concept: Finally, the downtime for maintenance has an influence on the capacity, but also on factors such as including a service tunnel or train crossovers. If a service tunnel is included, it can reduce the travel time for a maintenance crew to a site, reducing the overall downtime. Also including train crossovers will allow parts of the tunnel to be closed for maintenance instead of entire tubes.

3.1.1.5. Deliberations around the cost factors These technical cost factors show a strong correlation with each other. Some examples:

1. The maximum speed of a train determines the tunnel diameter and the train type.

2. Train (acceleration, breaking capacity and maximum speed) and track properties (sharp curves, inclinations, power supply) determine running times and thus the possible timetable. This in itself determines if a double or single track will be able to handle all the trains. Also an operational concept with only slow freight trains running during the night can affect the tunnel lay-out and number of tracks needed.

3. The tunnel lay-out and crossovers determines the possibilities for maintenance and renewal vs. the operational needs

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4. The use of the tunnel determines the safety measures required: only freight trains or only passengers trains requires other safety measures than combined traffic.

It is for this reason that these parameters should continuously be taken into account holistically (=taking them all always into account).

3.1.2. Projects evaluated for the technical benchmark

The following four technical projects will be benchmarked, it are four bored railway tunnels:

1. Channel Tunnel between France and Great Britain (a.k.a. Eurotunnel).

2. Gotthard Base Tunnel in Switzerland leading from the north of Switzerland (also covering part of the German market) towards the Italian speaking part of Switzerland and further towards Italy.

3. Brenner Base Tunnel between Austria and Italy.

4. Mont d’Ambin Base Tunnel as part of the Lyon-Turin high-speed and freight railway line in respectively France and Italy.

They will be compared with the FinEst tunnel (5) in the latest design stage of WP3.

The peer tunnels have comparable lengths, but of the four, only the Channel Tunnel is an underwater tunnel comparable to FinEst. The other three tunnels are bored under the Alps. Of the four tunnels, two are already completed and two are still under construction. This means that any costs associated with the last two projects are estimations and not actual figures – some other parameters might also not be 100% sure for these projects. For FinEst the latest numbers are used, dated End of November 2017.

3.1.3. Evaluation results of the technical benchmark

3.1.3.1. Tunnel construction cost factors benchmark results

Channel tunnel Gotthard base

tunnel Brenner base tunnel

Mont d’Ambin base

tunnel FinEst Link feasibility study

Status In operation In operation Under construction Under construction Planning

Completion

(*estimated) 1994 2 2016 3 2025* 4 2029* 5 2050*

TC1 – Tunnel length 50.5 km 2 57.1 km 6 55.0 km 4 57.5 km 7 102.3 km

TC2 – Tunnel layout

2 bores with one

track

1 service tunnel 8

2 bores with one

track 6

2 bores with one

track

1 service tunnel 4

2 bores with one

track7

2 bores with one track

1 service tunnel

2 Kirkland, C. J. (1995). Engineering the Channel Tunnel. London: E & FN Spon. 3 https://company.sbb.ch/en/media/background-information/gotthard-base-tunnel.html 4 https://www.bbt-se.com/en/tunnel/project-overview/ 5 https://ec.europa.eu/transport/sites/transport/files/annex_4_case_studies_final.pdf 6 https://www.alptransit.ch/fileadmin/dateien/media/zahlen_und_fakten/gbt_e.pdf 7 Menna, M. (2015). Lyon Turin Railway Link: An European Infrastructure. Netlipse network meeting. 8 https://www.getlinkgroup.com/uk/the-channel-tunnel/infrastructure/

https://company.sbb.ch/en/media/background-information/gotthard-base-tunnel.html

https://www.bbt-se.com/en/tunnel/project-overview/

https://ec.europa.eu/transport/sites/transport/files/annex_4_case_studies_final.pdf

https://www.alptransit.ch/fileadmin/dateien/media/zahlen_und_fakten/gbt_e.pdf

https://www.getlinkgroup.com/uk/the-channel-tunnel/infrastructure/

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TC3 – Tunnel

diameter 8.8 m 2 9 m 6 10.5 m 9 10.5 m 7 10 m

TC4 – Service tunnel Yes, diameter 5.8 m 2 No Yes, diameter 6 m 9 No Yes, diameter 8 m

TC5 – Passenger

crossovers between

tunnels

Every 375 m, from

running tunnels to

service tunnel 8

Every 325 m,

between running

tunnels 6

Every 333 m,

between running

tunnels 9

Every 333 m,

between running

tunnels 7

None

TC6 – Train

crossovers

Two, with crossing

tracks (x) 8

Two, non-crossing

tracks (/\) 10 None 9

One, non-crossing

tracks (/\).

Also two passing

tracks between

crossovers. 7

Three, non-crossing tracks (/\)

TC7 – Emergency

stations None 2 Two 10 Three 9 One 7 None

TC8 – Type of

geology Chalk marl

2 Crystalline rock 10

Various, including

tectonic plate

boundary. 11

Complex geology 12 Mostly crystalline Precambrian bedrock

of gneisses and granitoids

TC9 – Construction

methods 11 TBMs 2

4 TBMs (= 91 km)

Drill & blast (= 23

km)

3 intermediate

access sites 6

9 TBMs (= 77 km)

Drill & blast (= 33

km)

3 intermediate

access sites 9

8 TBMs + drill & blast

4 intermediate

access sites 13

Proposal to create 2 artificial islands as

intermediate access. Using both TBM’s

and drill-and-blast construction methods

TC10 – Spoil material 7,500,000 m³ 14 13,300,000 m³ 10 11,100,000 m³ 15 14,700,000 m³ 16 21,600,000 m³

9 Zurlo, R. (2016) The Brenner Base Tunnel Project. Netlipse network meeting. 10 https://www.lombardi.ch/de-de/SiteAssets/Publications/1214/Pubb-0394-L-The%20Gotthard%20Base%20Tunnel%20-%20Project%20overview.pdf 11 https://www.tunneltalk.com/Brenner-Base-Tunnel-Feb11-A-leap-forward.php 12 http://www.ambergengineering.ch/fileadmin/documents/EN_Referencesheet/Railway_new/Ref_Lyon-Turin_Ferroviaire_e_101216_N073_P062.pdf 13 https://www.tunneltalk.com/Lyon-Turin-14Aug13-57km-long-tunnel-design-and-construction.php 14 Maidl, B. et. al (1995). Der Eurotunnel: Geschichte, Planung, Bau und Betrieb. Essen: Gluckauf. 15 BBT: The Longest Railway Tunnel In the World. December 2016, The Sustainable Business Review. 16 http://tunnelbuilder.com/News/Construction-of-Access-Adits-Underway-on-Lyon-Turin-High-Speed-Line.aspx

https://www.lombardi.ch/de-de/SiteAssets/Publications/1214/Pubb-0394-L-The%20Gotthard%20Base%20Tunnel%20-%20Project%20overview.pdf

https://www.lombardi.ch/de-de/SiteAssets/Publications/1214/Pubb-0394-L-The%20Gotthard%20Base%20Tunnel%20-%20Project%20overview.pdf

https://www.tunneltalk.com/Brenner-Base-Tunnel-Feb11-A-leap-forward.php

http://www.ambergengineering.ch/fileadmin/documents/EN_Referencesheet/Railway_new/Ref_Lyon-Turin_Ferroviaire_e_101216_N073_P062.pdf

http://www.ambergengineering.ch/fileadmin/documents/EN_Referencesheet/Railway_new/Ref_Lyon-Turin_Ferroviaire_e_101216_N073_P062.pdf

https://www.tunneltalk.com/Lyon-Turin-14Aug13-57km-long-tunnel-design-and-construction.php

http://tunnelbuilder.com/News/Construction-of-Access-Adits-Underway-on-Lyon-Turin-High-Speed-Line.aspx

http://tunnelbuilder.com/News/Construction-of-Access-Adits-Underway-on-Lyon-Turin-High-Speed-Line.aspx

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Schematic overview of the five technically benchmarked tunnels projects (black are running tunnels, red is service tunnel, work access points are the places from which the tunnels were constructed)

All of the tunnels in this benchmark are twin-tube tunnels with a single track in each. In terms of length, the tunnels are somewhat comparable to each other, in the range of 50 – 58 km. As can be seen, the planned FinEst link is significantly longer at 105 km.

The red line in the figure above indicates the presence of a service tunnel, which is the case in the Channel tunnel and Brenner base tunnel and also planned for FinEst. In the case of the Brenner tunnel, the service tunnel also serves as an exploratory tunnel to provide information on the geology.

Looking at the possibilities for trains to cross over from one running tunnel to another running tunnel, there are several options. The Channel tunnel has two such crossovers, which also cross each other, while the longer Gotthard tunnel also has two crossovers, which do not cross each other. The Brenner tunnel has chosen not to install any train crossovers, but there is an exit towards another tunnel. In the initial design a crossover was foreseen The Mont d’Ambin tunnel has one crossover in the middle, which also includes two passing tracks.

The work access points are the places from which the tunnel was constructed and include front and end access and intermediate points. For FinEst, these intermediate points can be the artificial islands. It is noted that the FinEst project will have to construct longer tunnel lengths per access points compared to the peer tunnels, which has a negative impact on the construction costs.

The cost factors length and diameter can be related to the tunneling costs.

3.1.3.2. Rail equipment cost factors benchmark results

Channel tunnel Gotthard base tunnel Brenner base tunnel Mont dont dr base

tunnel FinEst Link


Completion (*estimated) 1994 2016 2025* 2029* 2050*

RE1 - Loading gauge, track

type and track width/gauge 1.435 mm

1.435 mm

Ballastless, Low

Vibration Track (LVT)17

1.435 mm

Ballastless 1.435 mm

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Ballastless, Low

Vibration Track (LVT)17 Ballastless 18

RE2 – Communication system GSM-R 19 GSM-R 20 GSM-R 21 GSM-R 22

RE3 – Traction power supply 25 kV 50 Hz 23 15 kV 16.7 Hz 24 25 kV 50 Hz 21 25 kV 50 Hz 22

RE4 - Signaling TVM 430 25 ERTMS L2 20 ERTMS L2 21 ERTMS L2 22

In terms of rail specific installations, a lot of similarity can be found between the tunnels. The track gauge is determined by the surrounding rail networks, thus 1,435 mm track gauge is used in all of the tunnels in this benchmark. In addition, the track type used are ballastless tracks (in particular the Channel tunnel and Gotthard tunnel use ‘low vibration track’).

In terms of electrification, differences can be found in the voltage and frequency. The Gotthard Base Tunnel uses 15 kV 16.7 Hz electrification while the other three tunnels use 25 kV 50 Hz (although in the Brenner Base Tunnel situations that is peculiar since it is surrounded by a 15kV 16.7Hz and 3kV DC electrified network.

It is known that the Channel tunnel power supply for both traction power as well as all auxiliary power by two substations (400 kVA each), one located at each end. In an emergency, the tunnel can be powered from each side separately.

When looking at the signaling systems, the Channel tunnel uses the French TVM 430 system while the other three tunnels use the ERTMS Level 2. The difference comes from the fact that the Channel tunnel was built 25 years ago when ERTMS was not yet standardized. Also, the connecting high speed lines LGV Nord in France and HS1 in the UK are equipped with TVM 430, thus the choice for this system allowed for a seamless connection. Both TVM430 and ERTMS allow for 3 minute intervals between trains and thus 20 trains/hour at maximum capacity with a speed of maximum 160 km/h in the Channel Tunnel and 200 km/h in the Gotthard Base Tunnel, although nowadays higher capacities have been reached up to 1,5 minute intervals at 200 km/h with ERTMS L2. Differences in speeds of trains travelling in the same direction significantly reduce the maximum capacity.

In terms of communication systems, all four tunnels use GSM-R, but it is questionable if this technology still exists at the moment FinEst Link needs to tender their communication system. Already in Finland, no GSM-R in the ERTMS system will be installed.

17 Low vibration track (LVT) system description [PDF]. (2011, January). Sonneville AG. 18 Menna, M. (2015). Lyon Turin Railway Link: An European Infrastructure. Netlipse network meeting. 19 Boudoussier, M. (2012). Eurotunnel is switching to digital and remains at the forefront of technology. European Railway Review, 18(1), 22-24. 20 ETCS Gotthard Base Tunnel, Tender Train Control and Signalling System. Emch+Berger Group. 21 http://www.railway-technology.com/projects/brennerbase-tunnel/ 22 Menna, M. (2015). Lyon Turin Railway Link: An European Infrastructure. Netlipse network meeting. 23 Kirkland, C. J. (1995). Engineering the Channel Tunnel. London: E & FN Spon. 24 http://www.cost-optimisation-electrification-congress.com/media/downloads/64-day-2-martin-aeberhard-sbb.pdf 25 https://www.getlinkgroup.com/uk/the-channel-tunnel/infrastructure/

http://www.railway-technology.com/projects/brennerbase-tunnel/

http://www.cost-optimisation-electrification-congress.com/media/downloads/64-day-2-martin-aeberhard-sbb.pdf

http://www.cost-optimisation-electrification-congress.com/media/downloads/64-day-2-martin-aeberhard-sbb.pdf

https://www.getlinkgroup.com/uk/the-channel-tunnel/infrastructure/

15

3.1.3.3. Tunnel technical installation cost factors benchmark results

Channel tunnel Gotthard base tunnel Brenner base tunnel Mont d’Ambin base

tunnel FinEst Link



TTI1 – Lighting 20,000 fittings 26 7,200 fittings 27

TTI2 – Ventilation Description below

TTI3 – Cooling Description below

TTI4 – Fire-fighting

4 SAFE fire-fighting

stops in tunnel.

Evacuation through

service tunnel 28

Evacuation through

other running tunnel

Tunnels need to be equipped with a variety of systems to ensure the safe operation, these include normal and emergency lighting, ventilation (both introducing fresh air as well as removal of waste heat and air), drainage and cooling systems and, in case of emergency, fire- and smoke-detection, fire-fighting, smoke removal and evacuation systems. Specific information regarding these systems is not yet available for the tunnels still under construction (Brenner and Mont d’Ambin) and standards for this kind of equipment are evolving rapidly.

As an example for lighting currently installed: the lighting systems of the Channel tunnel which has 20,000 fittings, while the much newer but also longer Gotthard base tunnel only has 7,200 fittings.

The Channel tunnel has four “SAFE” fire-fighting stations in the tunnel, where trains can stop in the event of an on-board fire and where it can be extinguished. They are located just after the crossovers. The train driver can either head directly to one of these stations or out of the tunnel in case of a fire on board. In case the train cannot continue, passengers are evacuated through the service tunnel. Ventilation in the service tunnel keeps the pressure higher than in the track tubes, preventing smoke from entering. In the Gotthard tunnel, there is no service tunnel, so evacuation takes place through the other tunnel, which is also over-pressurized in case of emergency to prevent smoke from entering.

From the fire-fighting measures, it becomes clear that a ventilation system is needed in order to regulate the pressure in the tunnels and provide fresh air in normal situation as well as in case of emergency. To provide fresh air, the tunnels in the Alps have fresh air ducts at the substations. In case of the Channel tunnel this is impossible, so the air needs to be transferred from the ends of the tunnel. Another ventilation system the Channel tunnel uses are the piston relief ducts between the two main tubes every 250 m. If a train moves through the tunnel, it creates a high pressure area in front of the train and a low pressure area behind the train. The piston relief ducts allow air to transfer from the front of the train to the back of the train via the other tunnel.

Water entering the tunnel is a problem, both for tunnels running under a body of water but also for tunnels running under a mountain. For this reason, all of the tunnels are fitted with a drainage system. The Channel tunnel has three pumping stations, consisting of a long sump perpendicular to the main tunnel and two longitudinal equipment galleries parallel to the tunnels. In the case of the

26 Foreign & Commonwealth Office (1994). The Channel Tunnel Story: The world's longest undersea tunnel system. London: Foreign & Commonwealth Office. 27 https://www.apm.org.uk/news/peak-performance/ 28 https://www.getlinkgroup.com/uk/eurotunnel-group/operations/safety/

https://www.apm.org.uk/news/peak-performance/

https://www.getlinkgroup.com/uk/eurotunnel-group/operations/safety/

16

Brenner tunnel, an important feature is that the service tunnel forms an essential part of the drainage. It is located about 12 m below the main tunnels, which allows water to easily flow out of the main tunnels towards the service tunnel.

Since these factors are hardly different between the tunnels, it is estimated that the costs factors expressed in a value per km are comparable for the four tunnels.

3.1.3.4. Pre-project connections and demand benchmark results

Channel tunnel Gotthard base tunnel Brenner base tunnel Mont d’Ambin base

tunnel FinEst Link



PP1 – Demand Cf below

PP2 – Existing connections Ferries crossing

Channel

Gotthard railway

tunnel (1882) and

Gotthard road tunnel

(1980), both around

600 m higher

Brenner pass rail/road,

580 m higher

Frejus railway tunnel

(1871), 758 m higher

PP3 – Capacity 178 trains per day 29 325 trains per day 31 400 trains per day 30

PP4 – Operational concept

Max. 160 km/h

Six sections shut down

once a week at night

for maintenance 29

Max. 249 km/h

Single tube completely

shut down for

maintenance (total of

22 hours per week) 31

Max. 250 km/h 30 Max. 250 km/h 32

The tunnels all represent an upgrade of an existing connection, however only the Channel tunnel attempted to upgrade another mode of transport. The other three tunnels all replace a slower train connection (higher elevation and steeper grades), so existing demand is moved from the older line to the new line. In the case of the Channel tunnel, it was expected that many travelers from the existing ferries would change to trains running through the tunnel. However, this did not happen as much as was predicted. Both the passenger and freight volumes for the Channel Tunnel were overpredicted. This can be attributed to two main factors: the ferries lowered their prices and the emergence of low-cost airlines. The absolute volumes that were predicted at the opening of the tunnel in 1994 have not even been reached in 2017. It has to be noted that the amount of air passengers between the Brussels area and Paris area towards all airports in the London area was around 4 million in 1994 and is still around 4 million passengers annually.

The maximum operating speed in the Channel tunnel is limited to 160 km/h, while the Brenner and Gotthard tunnel have operating speeds of 200 km/h. The latter two tunnels also have a higher capacity of trains per day compared to the Channel tunnel.

The layout of the Channel tunnel allows the tunnel to close every section once a week (= 6 nights), creating a single track operation for one third of the tunnel during maintenance. The Gotthard base tunnel closes one of the tunnel tubes for its complete length for maintenance (8 hours on Saturday

29 Kirkland, C. J. (1995). Engineering the Channel Tunnel. London: E & FN Spon. 30 https://www.bbt-se.com/en/tunnel/project-overview/ 31 https://company.sbb.ch/en/media/background-information/gotthard-base-tunnel.html and confirmed by the SBB press officer that the current allowable speed in the Gotthard Base Tunnel as permitted by the Swiss Transport Ministry ”BAV” is 249 km/h and not 250 km/h. However, this speed is not used in daily use. 32 http://www.railway-technology.com/projects/lyon-turin/

https://www.bbt-se.com/en/tunnel/project-overview/

https://company.sbb.ch/en/media/background-information/gotthard-base-tunnel.html

http://www.railway-technology.com/projects/lyon-turin/

17

and Sunday night, 6 hours on Monday night), creating a single track operation along the entire 58km length of the tunnel.

Passenger demand just before opening of operating tunnels and current demands on projects under construction or in the project phase

Passenger demand before opening shows for the Channel Crossing using the ferry already an amount 4 times as high as it currently is on the Link between Helsinki and Tallinn. This total demand has increased since the opening of the tunnel with 28% with about 10 million passengers using the Eurostar trains linking London with Brussels and Paris and another 11% travelling by car on the car shuttles through the Channel Tunnel. The competition with the airliners has increased with numbers in 1994 around 4 million passengers per year and similar numbers nowadays. Most of the passengers over the Gotthard and Brenner corridor go by car.

For FinEst, an increase is foreseen to 13 million passengers/year using the tunnel and another 11 million that will still use the ferry. These are comparable numbers to what Eurostar want to achieve following years through the Channel Tunnel. For this it runs almost hourly connections towards Brussels and Paris with some extra services in case of high demand and singular seasonal trains to the French alps. A direct service to Amsterdam will start in 2018.

The increase in demand can have good reasons which were/are not present at the Channel Tunnel:

18

- Dramatic market size increase between Helsinki (and further) and Tallinn (and further) currently not using this link

- Current commuters will start to commute on a daily basis instead of weekly basis now

- Large differences in GNP/inhabitant between the countries

- Much bigger relative travel time reduction than between Brussels/Paris and London

It remains a fact however, that the market for the Channel Tunnel already existed and the Eurostar service and car shuttle service had to tap into the existing market. The FinEst tunnel will have to generate new demand to reach the 184% demand increase.

Freight demand just before opening of operating tunnels and current demands on projects under

construction or in the project phase – current Cross Channel Ferry freight tonnages could not be obtained

With respect to freight, the current demands of all peer projects at the Gotthard and Brenner are a multitude of the demand at the FinEst-connection The Gotthard base tunnel has not even reached full potential, since the connecting Ceneri Base Tunnel and connecting railway lines are currently under construction or renovation.

19

Similar to the passenger forecasts, also for freight counts that the markets which are serviced through the other tunnels are already when the construction starts much higher than for FinEst.

Market share of the Channel Tunnel over time

The catch-up of the market share for the Channel Tunnel is significant and reached 45% after 6 years.

As a big difference the Channel Tunnel clearly has a lower maximum design speed (160 km/h) compared to the other benchmarked tunnels (e.g. 250 km/h in Gotthard tunnel), however most of the trains use the Eurotunnel with the speed of 160 km/h (all Eurostar and car shuttles) and only some freight trains and work trains are slower. Since these factors are hardly different between the tunnels, it is estimated that the costs factors expressed in a value per km are comparable for the four tunnels.

3.1.4. Technical cost benchmarking

After normalizing the capital expenditure to 2016 Finland euros33, a comparison can be made between the four tunnels. The lowest capital expenditure can be found for the Gotthard base tunnel. The two tunnels still under construction are somewhat comparable in costs, while the Channel tunnel clearly had the highest capital expenditure.

33 Normalisation is explained in annex 1.

20

Cost comparison between the benchmarked tunnels in normalized Finnish 2016 Euro’s.

For a cost comparison between the peer tunnels, of most importance are the following parameters:

I. Tunnelling costs (civil engineering part, including materials management and the

construction of (temporary) access to the tunnel under construction)

II. System costs (tunnel technical installations such as ventilation, lighting and safety systems,

buildings for service at the tunnel entrances)

III. Rail systems: track, catenary, power supply, signalling system, communication systems

IV. Project management, risks and owners cost

V. Connecting tracks and tunnels

VI. Terminals and stations

VII. Rolling stock

A and B also include the construction of emergency tunnels and firefighting positions within the

tunnels. Not for all peers a reliable division of costs could be obtained.

A potential risk reservation is observed for the Brenner Base Tunnel. For the Gotthard Base Tunnel is

was also reserved and not completely used.

21

With respect to the terminals and stations, only the Channel Tunnel and FinEst link have these. It is

noticeable that the costs for the terminals of FinEst are similar for the Channel Tunnel. For Channel

Tunnel they consist of terminals at either side of the tunnel each with ten 800m long platform tracks

for the shuttle trains, stabling and maintenance areas for these trains and reverse loops. It also

involves waiting areas for trucks and cars and border crossing and security control installations.

To guarantee a proper comparison only topics A-E will be added in further comparisons. The terminal

costs for FinEst and the Channel Tunnel and the rolling stock for the Channel Tunnel will thus not be

taken into account in any further comparison. The costs flowing into the comparison for FinEst are

thus EUR 14.02 billion

When comparing the tunnels in terms of diameter, length and total costs a peculiar observation is

made. The Brenner and Mont d’Ambin base tunnels have similar length, diameter and total cost. The

Gotthard tunnel has a slightly smaller diameter and slightly lower costs. The Channel tunnel has a

smaller diameter and length, but a higher total cost.

These costs can be expressed in a combination with the most important cost factors: tunnel diameter

and tunnel length and if 2 or 3 tubes are constructed.

From the results following can be concluded:

- The FinEst Link estimations come close to the estimations for the Gotthard Base tunnel (with a smaller diameter) and the Mont d’Ambin tunnel (with a bigger diameter), however, these are both tunnels without an extra service tunnel.

- The Channel Tunnel has the smallest excavation diameter, but the highest cost per tunnel length (as expressed here in the length between tunnel entrance and exit, not in the total tunnel length excavated).

- The Mont d’Ambin tunnel is most expensive per km of tunnel for a double-tube tunnel, probably due to the extra excavations necessary for the intermediate stations (including extra tracks).

- The Brenner Base Tunnel and Channel Tunnel, both 3 bore tunnels thus including a service tunnel and comparable to the FinEst project are 35-70% more expensive per tunnel kilometer than the current estimations of the FinEst Link tunnel project.

From the literature review several reasons for the high tunnelling costs for the Channel Tunnel could

be derived

I. Unique tunnelling project with several features which had never been done before

II. Badly organized interface management between the different contractors for specific tasks.

The construction task was divided into a multitude of small contracts with different

construction companies

III. The tunnel was only constructed from the outer ends, which resulted in a long logistical chain

– a situation partially true also for FinEst

IV. Challenging geology with large chalk formations with water cavities

V. Challenging situation in which French and UK standards had to apply

22

The combination of these factors resulted in high costs per tunnel kilometer. It was not possible to

determine the exact influence of each of the parameters on the total costs from public sources.

The low cost for the FinEst, can have its reason, e.g. geological. But at the same time, with only 2

intermediate access points, it is from a logistics point of view more comparable to the (rather

expensive) Channel Tunnel, then to the other peer tunnels. With their high amount of intermediate

access points.

Cost expressed in normalized EUR(2016) for Finland excluding stations and terminals and rolling stock

(2=2 running tunnels; 3=2 running tunnels + 1 service tunnel)

3.2. Economical benchmarking (topic 2)

When looking at the FinEst link project, the major organizational challenge is that it is a cross-border project between two EU countries and two capital regions. Several projects can be identified which have similar characteristics and will provide a good reference for the FinEst link project. This economical benchmark will aim to describe these projects and provide the major issues which were faced. FinEst link will be able to learn from these issues and improve their approach to facing them. Again, the same structure as in the technical benchmark is used: the main elements are presented (section Error! Reference source not found.), the list of projects is given (section Error! Reference source not found.) and finally these projects are evaluated (section Error! Reference source not found.).

3.2.1. Main elements to be considered in the economical benchmark

The economical benchmark can be split into four categories: organization structure, funding, cost estimation and time planning. The organization structure will describe the organization behind the

23

project (SPV) and any costs associated with the organization (e.g., such as risk provision, ownership costs, planning costs). The different sources of funding for each project are also described, along with any EU grants. The final two categories describe the accuracy of the initial cost estimation and initial time planning. The major factors influencing any changes to these initial budgets will also be identified.

3.2.1.1. Organizational structure The Organizational structure describes the organization that has been set up for the benchmarked economical projects.

O1 Set up: projects can be set up in several ways, depending on legal, financial and technical possibilities. Also of importance here is that for cross-border projects the ownership and legal (rules and regulations) have to be settled between countries.

O2 Ownership: The ownership structure describes in which the ownership is arranged.

O3 Special Purpose Vehicle: This is related to the ownership structure and describes in what kind of special vehicle is used whenever this is the case. Sometimes an SPV is used during the construction and another one during the operations.

3.2.1.2. Time planning Time planning includes original time line and the reliability of the time line, and influence causing deviations.

T1 Reliability of initial time line: describes the delays which were made in comparison to the initial time line

T2 Major risks influencing changes to the initial time line: the major risk that were the cause of the change to the initial timeline

3.2.1.3. Financing

The economically benchmarked projects received a Financing which is described using the following parameters:

F1 Potential EU grants: describes where applicable, if a EU Grant was received or not.

F2 Private / public financing provides an indication where, if applicable a public and/or private financing was used and in which way.

F3 User financed structures: describes the way in which users directly or indirectly contribute to the financing of the infrastructure

3.2.1.4. Cost estimation With respect to the Cost estimations (which are described in the previous paragraph), the question is if they were correct from the on-set, and if

24

C1 Precision of initial cost estimation: describes the precision in which the initial cost were estimated.

C2 Amount of change: provides an estimation of the change between the final costs and the estimated costs.

C3 Major factors influencing changes to the initial cost estimation describes the major factors influencing any changes between initial cost estimations and the actual cost of the infrastructure.

3.2.2. Projects evaluated for the economical benchmark

The projects used in the economical benchmark are a mix of infrastructure projects throughout Europe (in order of age):

1. Channel Tunnel between France and Great Britain (a.k.a. Eurotunnel)

2. Oresund fixed link: a bridge-tunnel combination carrying a highway as well as a railway line

3. HSL Zuid, a high speed line in the Netherlands, connecting at the border with a separate high-speed line in Belgium

4. Brenner Base Tunnel between Austria and Italy

5. Fehmarn Belt fixed link: a tunnel between Denmark and Germany, currently under construction.

6. Mont d’Ambin Base Tunnel as part of the Lyon-Turin high-speed and freight railway line in respectively France and Italy.

The FinEst link is not mentioned here, since the economical analysis is not ready yet and the contracts are not established or studied.

Three of these projects are also benchmarked from a technical perspective, but they are also cross-border EU projects. The Oresund and Fehmarn belt fixed link projects are both cross-border EU infrastructure projects and will provide interesting references for funding and risk division between countries. The HSL Zuid project is a domestic high-speed railway line project in the Netherlands, but it will provide an interesting reference for the public/private ‘scissor’ in a large railway project. Like in the technical benchmark, half of the projects have been completed and half are still under construction.

25

3.2.3. Evaluation of the results of the economical benchmark

3.2.3.1. Organizational structure benchmark results

Channel tunnel Oresund fixed link HSL zuid Brenner base

tunnel

Fehmarn Belt fixed

link

Mont dont dl base

tunnel

Status In operation In operation In operation Under construction Planning Under construction

Type Railway tunnel Combined rail/road

bridge/tunnel

High speed railway

line Railway tunnel

Combined rail/road

tunnel Railway tunnel

Completion

(*estimated) 1994 2000 2009 2025* 2028* 2029*

O1 – Set up Dedicated project limited company

Dedicated project limited company

Project bureau, with private company for superstructure and systems and public participation for civils

O2 - Ownership Private consortium 34

Public (50%

Sweden, 50%

Denmark) 38

Partly private, partly

public 35

Public (50% Austria,

50% Italy) 36

Public (100%

Denmark) 36

Public (50% France,

50% Italy) 36

O3 – Description of

SPV

Getlink (formerly

Eurotunnel) 37

Øresundkonsortiet 38

‘Scissor’ (private

company =

Infraspeed) 35

BBT SE 36 Femern A/S 36 TELT 36

The projects can be split into two categories in terms of financing and organization. The organization responsible for building and operating the Channel Tunnel was a private consortium of construction and engineering firms and banks. This is the only example of a privately organized and financed project in this benchmark. The Oresund and Fehmarn fixed link projects are similar in organization and funding. The company responsible for building and operating these links are publicly owned, but user financed (*along with some EU grant support). Both the Brenner base tunnel and the Mont d’Ambin base tunnel are publicly owned and financed. The HSL-Zuid is split into two categories, where the substructure was built using several Design & Build contracts while the superstructure was built by a consortium of private parties in a DBFM contract.

34 Kirkland, C. J. (1995). Engineering the Channel Tunnel. London: E & FN Spon. 35 http://www.infraspeed.nl/ 36 https://ec.europa.eu/transport/sites/transport/files/annex_4_case_studies_final.pdf 37 https://www.getlinkgroup.com/uk/home/ 38 https://sundogbaelt.dk/en/as-oeresund-2/

http://www.infraspeed.nl/


https://www.getlinkgroup.com/uk/home/

https://sundogbaelt.dk/en/as-oeresund-2/

26

Positioning of the different projects for their organization and financing

Many of the projects in this benchmark have used a publicly owned organization to construct (and

operate) the infrastructure project. The exception to this case is the Channel tunnel, which has been

completely constructed and operated by a private consortium of construction companies and banks.

The HSL-Zuid project had a split organization, where part of the superstructure and systems are

owned, financed, built and maintained by a private consortium (Infraspeed) and the substructure is

owned by the state. The state provides Infraspeed with performance payments based on the

availability. There is no SPV created for the complete infrastructure, but only a private SPV

“Infraspeed”. They were participating in the project organization.

The other projects all have a government owned organizations responsible for building and operating

the infrastructure, with ownership split 50-50 between the two countries. The only exception is the

Fehmarn belt fixed link organization (Femern A/S), which is completely owned by the Danish state.

Several projects also have an Intergovernmental Commission (IGC), which is responsible for

monitoring the organization on behalf of the governments.

Private Public Financing

Private

Public

Org

aniz

atio

n

Oresund*

Fehmarn*

Brenner Mont d’Ambin

Channel

HSL-zuid

27

3.2.3.2. Time planning benchmark results


tunnel

Fehmarn Belt fixed

link

Mont d’Ambin base

tunnel



bridge/tunnel

High speed railway

line Railway tunnel

Combined rail/road


Completion

(*estimated) 1994 2000 2009 2025* 2028* 2029*

T1 – Reliability initial

timeline + 1 year 39 0 years 40 +11 years 41 +10 years 42 +6 years 42 + 9 – 11 years 42

T2 – Major factors Political approval 40 Political approval 41 German regulatory

approval 42 Local support 42

Many factors can influence the time planning of a project, possibly having secondary effects on the

overall costs of the project.

In the case of the Channel tunnel, a long period of political debate preceded the project. Since 1802,

ideas arose that a fixed link between England and France was necessary. Finally, in 1985 proposals

were accepted for the design of a fixed link, of which the winner was the current rail tunnel. Ferry

operators protested the idea of a fixed links but to no avail, within 10 years the tunnel was built. The

main reason for the quick completion was the fear of new elections in Britain and France, new

leaders might have withdrawn support.

The Oresund fixed link project did not experience many setbacks aside from gaining political

approval. On the Danish side, a domestic fixed link across the Great Belt was needed before support

could be given to an international fixed link. On the Swedish side, it was the first infrastructure

project financed outside state budget. But despite discovering World War II bombs and having a

skewed tunnel segment during construction, the project was completed on schedule.

The Fehmarn belt fixed link also encountered some political setbacks. The regulatory approval in

Germany took so long that the project was delayed for 6 years.

For the Mont d’Ambin base tunnel, the major issue was the (lack of) support from the local

population in Italy. Violent protests have occurred causing the majority of the delay, dating back to

1991. On the French side, geographical surveys already started in 2003, while construction on the

main tunnel has started in 2017.

39 Kirkland, C. J. (1995). Engineering the Channel Tunnel. London: E & FN Spon. 40 http://www.omegacentre.bartlett.ucl.ac.uk/wp-content/uploads/2014/12/SWEDEN_ORESUND_PROFILE.pdf 41 http://martijnvanvulpen.nl/spoorgeschiedenis/nederlandse-spoorwegen/114-hogesnelheidslijn-zuid 42 https://ec.europa.eu/transport/sites/transport/files/annex_4_case_studies_final.pdf

http://www.omegacentre.bartlett.ucl.ac.uk/wp-content/uploads/2014/12/SWEDEN_ORESUND_PROFILE.pdf

http://martijnvanvulpen.nl/spoorgeschiedenis/nederlandse-spoorwegen/114-hogesnelheidslijn-zuid


28

3.2.3.3. Financing benchmark results


tunnel

Fehmarn Belt fixed

link

Mont dont dl base

tunnel



bridge/tunnel

High speed railway

line Railway tunnel

Combined rail/road


Completion

(*estimated) 1994 2000 2009 2025* 2028* 2029*

F1 – EU-grants No Yes 46 No Yes, 40% of total

costs 43

Yes, 16% of total

costs 44

Yes, 40% of total

costs 48

F2 – Public-private

financing Private 45 Private 46

Partly private, partly

public 47 Public 43 Private 43 Public 48

F3 – User financed

structures Yes 45 Yes 46 No No Yes 43 No

In the benchmark, 5 projects are cross-border between two EU countries. The only exception in this

benchmark is the HSL-Zuid project in the Netherlands, which is a domestic project. Except for the

Channel tunnel, all of the cross-border projects have received EU grants.

The Channel tunnel was completely privately financed, sharing the risk equally between the

Eurotunnel and the contractors. Again, these two parties were divided in terms interests (long-term

vs. short-term).

The dedicated railway tunnels (Brenner and Mont d’Ambin base tunnels) received up to 40% of the

total project costs from the EU, while the other 60% was financed using state budgets split equally

between the two countries.

The two Scandinavian fixed link projects also received some EU grants and have similar financing

structures. Both of the projects are financed outside of state budgets using a user-financed structure.

State guaranteed loans from (inter)national credit markets are used to meet the construction costs

and revenues from the fixed links are then used to repay these loans.

The HSL-Zuid project financed the substructure publicly and the superstructure privately. Initially the

project was planned to be completed using only publicly financed Design and Build contracts, but the

superstructure was built using a DBFM contract in the end. Performance payments are now paid to

the private consortium based on the availability of the infrastructure.

43 https://ec.europa.eu/transport/sites/transport/files/annex_4_case_studies_final.pdf 44 https://www.trm.dk/~/media/files/publication/english/eng-rapport_samfundsoekonomi-femern_incentive.pdf 45 Kirkland, C. J. (1995). Engineering the Channel Tunnel. London: E & FN Spon. 46 http://www.omegacentre.bartlett.ucl.ac.uk/wp-content/uploads/2014/12/SWEDEN_ORESUND_PROFILE.pdf Although 40% of this link has received EU funding, the fact that the major part went to the highway-connection, only 16% of the EU financing can be contributed to the railway link. 47 http://www.infraspeed.nl/ 48 Menna, M. (2015). Lyon Turin Railway Link: An European Infrastructure. Netlipse network meeting.


https://www.trm.dk/~/media/files/publication/english/eng-rapport_samfundsoekonomi-femern_incentive.pdf

https://www.trm.dk/~/media/files/publication/english/eng-rapport_samfundsoekonomi-femern_incentive.pdf


http://www.infraspeed.nl/

29

3.2.3.4. Cost estimation benchmark results


tunnel

Fehmarn Belt fixed

link

Mont dont dl base

tunnel



bridge/tunnel

High speed railway

line Railway tunnel

Combined rail/road


Completion

(*estimated) 1994 2000 2009 2025* 2028* 2029*

C1 - Precision of

initial cost

estimation

C2- Amount of

overrun 80% 49 78% 50 26% 51 - - -

C3 – Major risk

Cost estimations for different projects indexed around the start of construction (when the exact amount is fixed in a contract) and standardized in 2016 Finnish Euros

(C1) In the above figure, the cost estimation for several projects can be seen in the different phases.

The cost estimation at the start of construction has been indexed at 100 and all costs have corrected

for inflation, so any cost increase due to inflation is removed. This moment is chosen, since start of

the construction is one of the moments that a legally binding amount is set. The projects all show a

linear increasing trend throughout the project.

49 Anguera, R. (2005). The Channel Tunnel – An ex-post economic evaluation. Association for European Transport and contributors. 50 http://www.omegacentre.bartlett.ucl.ac.uk/wp-content/uploads/2014/12/SWEDEN_ORESUND_PROFILE.pdf 51 https://www.rekenkamer.nl/publicaties/rapporten/2014/07/01/hogesnelheidslijn-zuid-een-rapportage-in-beeld


https://www.rekenkamer.nl/publicaties/rapporten/2014/07/01/hogesnelheidslijn-zuid-een-rapportage-in-beeld

https://www.rekenkamer.nl/publicaties/rapporten/2014/07/01/hogesnelheidslijn-zuid-een-rapportage-in-beeld

30

The maximum increase can be found in the case of the Channel tunnel, where the final cost of the

tunnel was 87% higher than the estimation at the start. Interestingly enough there was a peak before

the start of construction: in 1982 the Department of Transport in the UK had estimated that the costs

would be higher than the price at which the concession was eventually awarded. In general it can be

stated that based on this peer group, during the construction of tunnel projects, prices will increase

with an average of 40%.

(C3) Two major factors that influenced the increased costs were:

1. Change of requirements in terms of safety, environment and security.

2. There was no clear owner of the project. On one hand, there are the short-term interests

(e.g., construction) and on the other hand are the long-term interests (e.g., operations).

These interests will not align during the construction phase and need to be well managed.

Another interesting fact is that the Gotthard base tunnel cost estimation went down towards the end

of construction. A large part was due to the inclusion of extra cost due to foreseen risks, which

eventually were not as large as expected.

3.3. Benchmarking results and issues to consider

The main conclusions from the benchmark are the following

1. The FinEst Link has lower projections for the combined freight and passenger demands than the compared projects. As a result, the expected revenues are lower.

2. The demand for FinEst is largely based on the commuting market, which does not yet exist at the level of the demand estimates, while the peer projects tap into existing markets.

3. The projected cost for FinEst link is lower than for peers. Given the fact that similar construction technologies are used, it is possible that the cost could be higher/ in the range of peers.

4. Benchmark projects indicate cost increases between feasibility study and project finish of a factor 0.5 to 6 in the compared projects with no experiences of reducing costs after construction start.

5. Several alternative financing and funding options are available which have shown their value and can be of interest for the FinEst project.

The following aspects should be considered for further study in future project phases:

- Role of freight both by shuttle trains as well as normal freight trains.

- Evaluated projects benefits mainly flow to Estonia. Should Finland benefit more of the project taking into account Finland’s geographic location and Rail Baltica?

- Phasing of tunnel construction/ single track model could facilitate significant cost savings and risk reduction – first only one tunnel and hourly connection and development of system as there is growth – we propose that especially the cost-benefit aspects of this alternative be studied further (cf. also to annex 2).

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4. Issues to be considered regarding the financing of the FinEst Link project

In this section, various factors to account for in the financing of the FinEst Link project are described. The project maturity does not yet allow for final decisions regarding the financing structure and factors presented should be considered as a list of issues that need to be considered further to facilitate decision making and ultimately the financing of the project.

The preferred financing and procurement model will depend on several factors such as preferences and requirements for risk allocation flexibility, cost of capital and the public and private sectors' ability to finance and fund the project over time.

This section discusses three main issues regarding funding and financing of the FinEst Link project:

1. Alternative models of project risk allocation can be used to achieve project objectives and cost efficiency. Often project financing is structured to support risk allocation objectives.

2. In addition to risk allocation, financing can be used to meet affordability criteria for the project, i.e. to overcome gaps in income and investment funding52.

3. Financing sources and structure will be presented to include factors regarding market capacity and alternatives for further market dialogue.

4.1. Financial models and risk allocation

It is generally considered that risks in infrastructure projects should be allocated to the party that is best suited to manage the risks. This should result in the lowest long-term cost of the risk and capital. The resulting benefits from this is often referred to as “Value for money”, i.e. the best available use of public financial resources. From a more practical perspective it should be noted, that no party should be expected to bear a risk where the potential magnitude of the risk cannot be absorbed.

Risk transfer in infrastructure projects is often linked to a model of long-term financing. From a procuring authority’s viewpoint, repayment of financing acts as an effective guarantee for project performance when linked to a suitable payment mechanism. From the private service provider’s viewpoint there is an added element of due diligence during project preparation including design process and cost estimations combined with transfer of risks to contractors such as construction companies.

52 A distinction will be made regarding investment funding and financing. When talking about funding, reference is normally made to the sources of cash that ultimately bear the cost of projects (e.g. taxes and users who may pay to use a system). Financing, is money that must be paid back (e.g. loans or equity from the public or private sector). Finance is used to bridge the gap between project inception, when funding may not be sufficient, and later when resources are eventually available to pay for the project. Source: PPP Motivations and Challenges for the Public Sector, European PPP Expertise Centre (EPEC), 10/2015

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A general framework for contract models in infrastructure projects can be seen in the image below:

The aim with the alternative contract models is, depending on project characteristics to allocate risks in a way resulting in overall maximum cost efficiency. If a project is itself commercially feasible without public sector support, it is usually most efficient for the public sector to allow the private sector to carry out the project (potentially imposing some regulation, if required by public policy goals).

In infrastructure projects there usually exist, some risks that the private sector cannot effectively evaluate or manage (often e.g. demand risk). If the private sector cannot manage or assume a risk at all (e.g. political decision-making) these should be retained by the public sector in order to make a project bankable.

In the following sections, some general descriptions of public and private project models with varying risk allocation are portrayed. In practice, project models are always “hybrids”, which will contain some project specific variations to a standard scheme.

4.1.1. Project financed by public sector

In a publicly financed and owned project, the public sector is responsible for procurement, construction and operation of the transport link. In the benchmark study, typical examples are the Öresund Bridge and the Fehmarn link –tunnel.

A publicly financed project could be structured as follows:

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Typically, public projects are procured as Design-Build contracts or similar structures that are focused mainly on the investment preparation and investment phase of the project. Risks related to life cycle cost and fitness for purpose lie with public sector owners.

The project is made bankable using public credit support structures such as debt guarantees and payment guarantees to ensure cash flow for debt services. Different credit support structures can be combined to function as complementary structures, which will determine the overall risk and cost of financing. Possible credit support alternatives can be seen in the picture below highlighted in yellow:

Construction of FinEst Link system

Public SPV*

Owner and arranger of operations of project

Construction agreements for infrastructure

Tunnel construction and systemss

Stations/ Terminals/Depots

Rolling stock etc.

Maintenance and operations agreements

Operation of FinEst Link system

Tunnel and systems maintenance

Operation and personnel costs

Additional services, e.g. cargo handling

Deb

t gu

aran

tee

Grant financing**

Debt financing structure e.g.**

EIB/NIB/EBRD and other multilateral

lenders/financiers

Commercial Bank financing

Debt

CEF /other EU aid

State/ Region direct financing

Equity

Capital market financing and direct loan financing

* SPV=Special purpose vehicle is a company formed for the realisation of a specific project

** For a more detailed discussion of financing sources please refer to section 4.3*** For a more detailed discussion of demand risk please refer to section 4.2.2

Equity investments e.g.**

Other public funders

/shareholders

Project owners

Public SPV*





lenders/financiers


Other public funders /shareholders


Market based system revenues Users

(Passengers & Cargo)

Additional funding to cover income shortfall***

Deb

t gu

aran

tee



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Benefits of the publicly owned and financed project model are:

- The public model can be implemented quickly when political and funding decisions have been made

- If public credit support such as public loans or debt guarantees are used, the project will have the lowest possible cost of capital

- There is flexibility for changes during the investment phase and project life

- Due to the large scale and possible uncertainties regarding the FinEst Link project, some risks e.g. linked to project size and public decisions and processes could be best managed by the public sector

- A possibility to split procurements into smaller lots could increase cost efficiency

Some challenges to account for in a possible publicly owned contract model for FinEst Link are:

- Public project owners will need to manage project risks (technical and commercial) internally

- Limited integration of design, build, maintenance leading to several procurement processes could increase internal and external interface risk

- Limited due diligence could result in uncertain cost estimates, insufficient risk management activities or changes in project scope

- Requirements on project owners to organize and staff the project

- Limited long term incentives, risk transfer or certainty about performance

- Maximum project costs are difficult to estimate beforehand and could affect state aid considerations

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4.1.2. Privately financed project /PPP

Privately financed PPPs can be used to ensure life cycle performance of the asset and delivery of the service in accordance with agreed timescales and performance specifications. Some, in particular technical responsibilities of the project are shifted to the private sector service provider.

A part of the risk (e.g. schedule, cost-overrun) will transfer to the contractor compared to a more traditional e.g. design build structure. The service provider should be able to identify and manage these key risks of the project more efficiently than the public sector. Not all risks will be shifted to the private service provider.

Typically, privately funded infrastructure projects are made bankable through a public payment stream that can be combined with market-based revenues from the system. An example of the functioning of a payment structure can be seen:

Three party agreement

Procuring authorities

Construction of FinEst Link system

Grant financing**

Private SPV*





lenders/financiers


Debt

CEF /other EU aid

State/ Region direct financing

EquityPublic funders /shareholders


Construction agreements for infrastructure

Tunnel construction and systemss

Stations/ Terminals/Depots

Rolling stock etc.

Maintenance and operations agreements

Operation of FinEst Link system

Tunnel and systems maintenance

Operation and personnel costs

Additional services, e.g. cargo handling

Other investors

Infrastructure investors

Service/ concession agreement***



Grant financing

Lump sum grant payments

Project owners

Market based system revenues

Service payment based on agreed payment mechanism / availability

Private SPV


Sharing of service payment

Possible other public sector

parties

Periodic grant


Users (Passengers &

Cargo)

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The payment stream is typically based on availability of the system (so called ‘Pubic Private Partnership’ or PPP). If the private party also retains demand risk, the payment is based on what is called a ‘concession agreement’. Availability payments can be combined with operation or investment grants depending on project type and size.

The project financiers (equity and debt) are paid over time based on the system performance in service payments and user charges. User charges can alternatively be charged by the procuring authorities, which in principle further reduces the credit risk for the projects financiers.

Benefits of the private (PPP) financing model are:

- Life cycle approach and long term responsibility of constructors and owners with fixed prices and on time delivery

- Private financing can reduce investment phase funding requirements of the public partners

- Risk transfer should result in functionality and savings from the public stakeholder’s viewpoint

- Internal interface risks of the project are efficiently handled within a suitably incentivized project organization

- Project transfers to public ownership after the project agreement has ended

Issues to account for in a possible PPP contract model for FinEst Link are:

- Higher financing costs compared to public credit risk

- Risks related to political, zoning, interface with other utilities (e.g. Baltic Connector and other networks) and force majeure events cannot be transferred

- Technical risks that cannot be fully managed until actual construction works could result in large risk reservations in fixed price agreements

Procuring authorities

Private SPV*




lenders/financiers




Service payment to make project bankable***


Public funders /shareholders

Other investors

Infrastructure investors

Users (Passengers &

Cargo)


** For a more detailed discussion of financing sources please refer to section 4.3

*** For a more detailed discussion of demand risk please refer to section 4.2.2

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- The public sector needs to carry the demand risk (using a suitable availability based payment or minimum revenue guarantee)

- Contracts are inflexible during the contract term

4.1.3. Hybrid structures

Hybrid structures in practice employed especially in big projects due to funding restrictions or project risk characteristics that make the project unsuited to be realized as a purely public or private project. Possible structures that could be used in the FinEst Link project are:

Scissor approach: One example of a hybrid structure could be where parts of the project could be delivered as PPPs and part as public projects. An example of this type of “scissor” approach is the HSL Zuid project that has been considered in the economic benchmarking. A hybrid “scissor” -model could provide benefits from both types of models regarding risk allocation and project funding considerations.

Limited credit guarantees from public sector: Public financing with limited credit support (i.e. guarantees cover less than fully the project’s (debt) liabilities) can be considered as a hybrid structure. The Öresund Bridge and Fehmarn Belt tunnel project could be seen as Public hybrid structures, where the public sector does not provide full credit support to project lenders.

Adjusted risk allocation: A model used recently is the private financing model of the £4,2bn Thames Tideway tunnel project. The project can pass on cost overruns to clients and there is public support on some factors such as insurance. The private financing cost of capital for the TTT project is 2.497%53. In the Thames Tideway Tunnel project, a partnering model is employed during the investment phase.

The following sections will consider risk allocation in standard and hybrid models.

4.1.4. Financing and risk allocation in the investment and operation phase

There is a difference in the risk profile of the project during the investment phase and the operation phase.

‐ Investment phase risks consist especially of issues that affect the design and building activities resulting completion risks, i.e. delays or overruns of budgeted costs.

‐ During the operation phase, risks mainly arise from issues that could affect availability and revenue of the system.

For the FinEst Link project, risk allocation in practice can be challenging due to project characteristics such as:

53 Alternative Models for Funding and Financing Infrastructure, The Infrastructure Forum, 11/2017

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- The large project size makes it difficult for parties to absorb risks that are realized during the investment (affecting cost and time schedule) and operations phase (affecting operating revenues and costs).

- The funding requirement will require large commitments from public project stakeholders and financial market participants, which will require financing structures that differ from ones commonly used for projects in Finland and Estonia.

- Local technical and financial expertise is not familiar with challenges related to the development of this type of project.

- Risks regarding permits and licenses can be especially challenging in a cross-border project such as FinEst Link.

In the next sections, a hybrid model is presented where risks are shared during the investment phase based on a partnering, or alliancing model, combined with a private financing structure. A suitable contract model could facilitate the management of risks without resulting in an escalation of the project price/total cost. Procurement of this type of contracting model is further discussed in the following section. The presented hybrid model could in some circumstances result in more suitable project risk allocation compared to standard contract model risk allocation.

For all models, full transfer of demand/ revenue risk to a private party is not seen as a suitable risk allocation. Demand risk can on the other hand be structured into incentives for the owners and operators. Transferring some of the completion and availability risks to the private party is typically seen as elements that can increase Value for Money for the public sector.

The model (contracting, financing) for the project should be carefully studied before decision making and in all cases market interest and capacity to carry out the project based to the model should be ensured by entering into sufficient market dialogue (contractors, planners, investors, lenders, etc.).

Below in an illustrative example of a risk- matrix for the project is shown, with preliminary proposals on how risks could be allocated in alternative private financing models to create feasibility and value for money:

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Item Risk type Can risk be transferred? Public Shared Contractor Public Shared Contractor Public Shared Contractor

Long term need for system/ macro

economic conditionsRevenue, Political Intolerable Public Public Public

Setting of technical and operational

requirements Completion Undesirable Public Shared Shared

Planning and environmental issues,

land acquisitionRevenue, Political Undesirable Public Public Public

Setting of customer payment rates Revenue Intolerable Public Public Public

Design and construction of System,

internal interface riskCompletion Acceptable Shared Contractor Shared

External interface risk Completion, Availability Undesirable Public Public Shared Public Shared

Technical operation and O&M planning

(routine/ life cycle etc.)Availability Acceptable Contractor Contractor Shared

Commercial operation (Marketing to

passangers and freight service clients)Revenue Undesirable Public Shared Shared

End of term condition (handback) Availability Acceptable Public Contractor Shared

Construction phase financing Completion Acceptable Public Contractor Contractor

Long term financing Completion Acceptable Public Contractor Contractor

Force Majeure Revenue, Political Intolerable Public Shared Shared

Government policies, change in lawCompletion, Availability, Revenue,

PoliticalIntolerable Public Public Public

Demand risk and funding of service

(who pays)Revenue Intolerable Public Public Public

Public project PPP Hybrid model

Risk allocation of operations and services (preliminary proposal for further discussion)

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4.1.5. Procurement model for partnering based contracting model

One option to procure a partnering based model could be to use a ‘development phase’ to optimise project scope and structure between the end of the formal procurement procedure and the final investment decision. A development phase could be based on the concept of partnering or ‘alliance’ that has been used in several Finnish projects during the past years.

Partnering models are often open-book, target pricing based contracting models that increase transparency vs. e.g. traditional turnkey contracts. Risks of cost overrun and delay are shared rather than placed entirely on one party. With suitable adjustments regarding risk allocation over the project life the model could also allow for a functioning private financing model54.

The selection of the partner could be based on the new procurement directive and the innovation partnership procurement or a negotiated procedure:

If private financing is required, the capacity to provide and arrange private financing to the project should be evaluated during the procurement process. One or two partners could be selected for the development phase.

In order to commence a formal procurement process for project partners, a requirement would be that all public agreements have been signed so that the public commitments can be fully evaluated by bidders. During the development phase total costs (based on contracting model acceptable to project financiers) could be developed. Risk allocation should draw on market practice in order to be understandable and to facilitate documentation.

A development phase -model combined to a long-term service agreement/ concession could provide benefits from the integration of design and construction from an early stage of the project.

54 Combining the current Finnish alliancing model to a DBFM contract would require some developments regarding risk definition and allocation in different project phases

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4.2. Available funding for the project

4.2.1. Affordability and public funding sources

Budgetary constraints in the FinEst Link –project will be based on e.g. EU and Finnish/ Estonian state subsidies available during the investment phase and operating phases. The public budget available for the project can also be called the affordability for the public parties, so a project cost that exceeds the affordability limit will result in the project not being realised. One key aspect is to split the subsidies and other funding sources between investment and operation phase subsidies.

The need for public grants and subsidies can be reduced e.g. by using private finance and different forms of credit support (e.g. state guarantees or minimum revenue mechanisms) for the project financing. However, private financing needs to be repaid, which in the end will require a (public or private) funding source. Government guarantees will result in state aid that can be notified with the EU Commission.

From a practical viewpoint, the overall budget must be known in order to make political decisions or to commence tendering of the project and for tenderers to be able to estimate viability of the overall project. Factors to consider when setting budgets are general budgetary policy, accounting rules, balance sheet treatment and income estimates for the states in addition to the selected project contracting model and price risks associated to these.

In taking account of budgetary limitations for different parties a so called blending approach can be taken, where different forms of funding and payments are combined over time to facilitate an overall financing and funding structure for the project. A blending approach can also assist in setting a maximum limit to project costs during the project life (if e.g. a PPP –model is employed).

As the FinEst Link project develops, budgetary limitations for the project as a whole (Finland, Estonia, EU, others) must be evaluated in the overall financing structure and cash flow profile.

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The objective should be to improve the commercial viability of the project while keeping the EU and state contributions and risk exposure at an acceptable level so that public budgetary allocations can be minimised.

4.2.2. Demand risk

Projects where the public authority assumes demand risk and the private provider is responsible for availability are typically publicly owned projects or when privately financed, called Public Private Partnerships or PPPs. When demand risk is transferred to a private party in a privately financed scheme, contract model is typically called a concession.

Demand risk for transport infrastructures is difficult to estimate and projects where demand risk has been transferred to private parties have often resulted in sub-optimal results. These have ranged from problems for the private operator to unexpected windfall profits not in line with project risk levels.

Based on current demand and revenue estimates it is improbable that the FinEst Link project could be realised while placing full demand risk for the use (passengers, freight) on a private party. Alternative risk allocations and especially demand risk alternatives will result in significant differences in financial parameters (e.g., debt service cover ratios and Debt: Equity parameters). Revenue guarantee mechanisms should account for possible unexpected financial returns or windfall profits. A suitable profit sharing mechanism for operation phase profits or clawback mechanism for grants/ subsidies should be included when risk-sharing mechanisms are used.

Different incentive arrangements can be used to further share responsibilities in a way where public and private parties can allocate their efforts and resources in the best possible way. In general, additional incentive mechanisms would account for alternatives regarding the sharing of demand risk. Below can be seen a general model for a demand risk-sharing model based on a minimum return guarantee and return cap:

Source: Alternative risk and profit sharing approaches to align sponsor and investor interests, U.S. Department of the treasury Office of Economic Policy, April 2015

Revenue guarantee mechanisms should result in the operator allocating effort in marketing of the system to new users and maximising the potential from existing users.

The illustrative financing model used in this report is based on parameters that would assume no or a low level of demand risk for the FinEst Link project operator.

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4.2.3. State aid issues

Based on Article 107(1) in the TFEU (Treaty on the Functioning of the European Union) state aid can be present in an economic activity (including infrastructure projects) if the following are true55:

‐ There is a transfer of Member State resources (national authorities have discretion as to use of);

‐ Which creates a selective advantage for one or more business undertakings (would not arise under normal market conditions);

‐ That has the potential to distort trade between in the relevant business market; and

‐ Affects trade between the Member States.

Where all of these criteria are met, State Aid is present and the support shall be unlawful unless provided under a European Commission exemption. State aid can be present and deemed compatible (allowed) if it falls under certain compatibility criteria (objective of common interest, necessity and proportionality and effect on trade).

The Öresund fixed link opened in 2000 and is funded based on state guarantees and a special tax regime for the project. In 2013 a complaint was made by a ferry company based on the sub market fees for crossing Öresund. The European Commission decided the guarantees are compatible. The decision has been appealed.

In addition, the Fehmarn Belt Fixed Link tunnel (€4,7bn) will be financed with state guaranteed loans. The project has been defined as an important project of Common European interest and achieving the Union’s transport policy objectives, functioning of the Internal market and social and economic cohesion, so the European Commission does not find it necessary to evaluate the existence of state aid, as possible aid would per definition be compatible.

During next steps of the FinEst Link –project the project owners should address the potential issue of State aid. The project can commence discussions with the European commission (DG COMP) and the relevant local ministries (Finland Ministry of Economic Affairs and Employment, Estonia Ministry of Finance) at an early phase of the project to minimise risks regarding state aid.

4.2.4. Balance sheet treatment

In some instances, governments have aimed to find ‘off balance sheet’ financing structures for infrastructures i.e. financing projects without the assets and debt appearing on public sector accounts. Off balance sheet treatment has been considered in a publication by Eurostat and EPEC56. In Finland, no infrastructure projects (including PPPs) have been recorded as off balance sheet –projects.

It is generally considered that balance sheet treatment should not be a driving factor in determining the financing structure of a project. However, off-balance sheet treatment at some point in the project’s life cycle could result in e.g. the following overall benefits57:

‐ Getting assets and debt off government's balance sheet does free it up for other expenditure and investment

55 https://en.wikipedia.org/wiki/European_Union_competition_law 56 A Guide to the Statistical Treatment of PPPs, European PPP Expertise Centre (EPEC)/Eurostat, 9/2016 57 Alternative Models for Funding and Financing Infrastructure, The Infrastructure Forum, 11/2017

https://en.wikipedia.org/wiki/European_Union_competition_law

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‐ private sector's management of assets introduces those specialist skills in cost management, project and service delivery

‐ Infrastructure by its nature is long term, and it is therefore suited to long term investors, such as pension funds.

Considering that the estimated FinEst -link project cost is over 15 billion euros, and the public debt of Estonia is 2,2 Billion euros (2016), the project exposure would result in a markable increase in public debt liabilities.

4.2.5. Interest rate assumption

Interest rate levels are currently (12/2017) historically low. Low long-term swap rates facilitate the financing of large projects:

Financing agreements can be linked to inflation to make initial interest rates lower. Inflation linked financing structures are attractive especially to e.g. pension funds that can in this way ensure conservation of purchasing power with inflation linked structures.

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4.3. Structuring of the financing

The financing structure and the future financiers of the project depend heavily on the project’s characteristics (to be determined by project owners) and the characteristics of available financing in the market (depending on prevailing market conditions at each time).

The amount and type of different financing sources will ultimately depend on the level of risk regarding the project’s cash flow but especially in a project as large as FinEst Link, also market capacity and market conditions will affect the final structure.

Below can be seen an image of a general financing structure and elements for an infrastructure project under a public/publicly owned and private financing structure:

4.3.1. Project debt capacity

The main driver of the project’s capital structure is the free cash flow that can be used to service debt and provide possible equity investors their expected return to the project. If the project can be structured in way that maximises private financing and minimises public subsidies this should result in a model that would most likely result in a positive investment decision and overall project outcome.

The main component for evaluating sufficiency of cash flow is the debt service coverage ratio required by the debt financiers for the project. The debt service coverage ratio (DSCR) simply describes the ratio of cash flow available for debt service vs. the cost of debt service in a given period (or as average over project life or some other period).

The level of DSCR required depends on project risks. Illustrative levels are shown below:

- Infrastructure projects with purely public payment streams and an authority to increase prices or inject payments to a project could be structured with as low levels as 1,05x cover ratios

- Infrastructure projects with no revenue risk and low technical risk could have a DSCR level of 1,1x – 1,15x increasing to e.g. 1,2x-1,3x with some level of predictable demand risk

- Infrastructure projects with relatively predictable demand risk (greenfield) could be required to achieve a DSCR of 1,4x more difficult demand risk project could require levels of above 1,8x

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For the purposes of this analysis, a DSCR of 1,2x is assumed for private financing which could mean a level of minimum revenue guarantee and allocate some construction and availability risk to the private project owner.

4.3.2. Market capacity

The project size will require for different types of financiers to co-operate in organising the project financing. Also loan tenor and refinancing risk needs to be accounted for in the long financing periods required for the project.

As the amount of equity and debt requirements for the project are substantial, an option to consider is a funding process led by the project and its partners during a development phase as discussed in section 4.1.5.

Another aspect of market capacity is the ability of the project and its current owner’s (Estonia and Finland) capacity to raise debt financing. Considering that the estimated project cost is over 11 billion euros, and the public debt of Estonia is 2,2 Billion euros (2016), the liability would be a markable increase in public debt liability. Finnish government debt is 107 billion euros (2017). The net additional debt for Finland per year has been estimated at 3 billion euros for 201758 and at a similar level for 2018 so also for Finland the required debt financing would not be insignificant.

4.3.3. Sources of financing - Debt

Options available for financing of projects have increased in the past years as alternative debt financing sources have increased.

The increase is partly driven by traditional bond investors looking for improvements in yield compared to traditional sovereign and corporate debt while maintaining a stable level of cash flows in return over time. Another driver are the central banks debt programmes which leads to a level of uncertainty regarding the future development of the debt market.

In this section of this report, a general description of various financing sources that could be available for FinEst Link is given.

Commercial debt

‐ ‘Traditional’ financing from banks that have capacity to evaluate project risks and provide long term financing

‐ Can be very flexible in the structuring of financing during the investment phase and over the life of the project

‐ Debt tenors for banks are still shorter than in the other alternatives presented below

‐ Leasing financing is an option similar to bank loans, which could be attractive for parts of the system (e.g. rolling stock) depending on the final project structure

‐ Currently there are banks that can provide long-term debt. However, bank financing is not expected to be available for the financing of the whole debt requirement of the project due to the significant funding need.

58 https://yle.fi/uutiset/3-9969477

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European investment bank (EIB) / Nordic Investment Bank (NIB)

‐ EIB via the EFSI and NIB via its normal operations should be able to provide long term financing without counter guarantees in various private and public financing models.

‐ EIB and NIB however require other financiers to take commercial risk (they will normally lend max. 50% of debt financing, but the percentage would probably be less in a project of FinEst Link’s size).

‐ Another option could be to use EIB financing to create a project bond solution (see below Capital markets financing). This could be one way to optimise the involvement of EIB in the project.

‐ EIB also provides an advisory service (European investment advisory hub /EIAH), that could be engaged in order find the most suitable EIB involvement (e.g. debt and bond options). EIAH should also be able to assist in the evaluation of other EU financing options (subsidies etc.).

Capital markets financing

‐ Financing directly from capital markets via issuing bonds.

‐ Investment phase financing (multiple drawdowns) has been an issue for infrastructure loans but the market has developed ways to account for these.

o One way is to involve banks in the construction phase with shorter tenors (which however could result in a refinancing risk at the end of the construction phase).

o Amortising debt structures were previously seen as an issue, but these should be available in the current market.

‐ Requires a credit rating for the project, but the transaction cost for this size of project is not significant compared to the total project cost.

‐ Project debt can be enhanced via Mezzanine financing tranches or monoline insurance (especially longer maturities) to facilitate a suitable credit risk level for investors, which can be difficult to achieve in other forms of financing.

Private debt

‐ Similar to capital markets financing but loans directly from investors (e.g. pension funds) or ‘clubs’ of investors working together.

‐ Institutional and other equity and debt investors are currently moving towards establishing infrastructure teams that are able to evaluate infrastructure financing.

‐ Investor debt can be more flexible regarding construction phase financing, utilising delayed drawdown schedules allowing a refinancing with terms that are known at the outset of the investment period.

‐ Recent direct debt investments have been quite small compared to the FinEst Link project.

Other sources of financing

- Some structures could incorporate index linked (e.g. CPI –linked) structures to the debt coupon to make the return more attractive to long term investors.

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- Local specialist lenders, e.g. Finland’s Municipality Finance are special purpose financiers, which could be eligible to finance parts of the project depending on the financing structure and available guarantees.

- National and multilateral lenders and investors outside Europe have also shown interest towards European infrastructure projects. Possible financiers could be e.g. Asian Investment bank, Bank of China or the Commercial bank of China.

4.3.4. Sources of financing – Junior and Equity financing

Junior and equity financing is the risk bearing part of the project’s capital structure. In practice, these capital sources have ownership and upside potential if the project is successful but lose their return, capital and decision-making rights if the project does not perform. Junior and equity investments are expected to return around 10 % p.a. over the project life for low risk infrastructure projects.

Return levels and equity requirements for the FinEst Link project are difficult to estimate, as similar transactions do not exist. Sufficient dialogue with financiers and investors should be kept during project preparation and when deciding on the final financing structure of the FinEst Link project.

Equity financing

- The ‘owner’s’ risk capital in the project.

- Currently there are a number of infrastructure funds looking for equity investments in infrastructure in Finland and the Baltics.

Mezzanine financing

‐ Mezzanine financing is a form of debt that is subordinated to traditional senior debt but is still cheaper than equity. In practice it requires lower debt service cover rations than senior debt and can be counted towards the equity requirement of the project.

‐ Mezzanine financing is used to decrease the amount of direct equity and improve overall funding capacity.

‐ Mezzanine capital is normally provided by infrastructure investors and sometimes banks.

‐ EIB has also invested in some project bond structures, where mezzanine debt is used as credit enhancement to improve the credit rating of the senior debt portion of the financing structure.

Multiple tranches of junior capital

- For a large project such as FinEst Link it could be relevant to consider multiple tranches of financing that would cater for investors with different risk appetite.

4.3.5. Grant financing

Grant financing can be available in different forms for the project.

‐ EU financing – One main grant element expected to be part of the project include EU TEN-T grants.

‐ Other grant financing elements include, State financing, Cities and Regions

49

4.3.6. Conlcusions regarding sources of financing

The financing structure and the future sources of finance for the project will depend on the project’s characteristics (to be determined by project owners) and the characteristics of available financing in the market (depending on prevailing market conditions at each time). The project capital structure can be expected to conform to the contract structure as the project evolves. It should however be noted, that investor and financier availability will depend on credit and funding support from outside the project, i.e. the project owners Finland and Estonia and other public stakeholders.

The scope of this assignment did not include a financial market dialogue. On a general level, the market for long term infrastructure financing is currently quite active and a financing arrangement even for a project of this size should be achievable if the contract terms are “bankable”, taking into account e.g. demand risk and uncertainties regarding reaching the final design and target cost of the project.

4.4. Issues to consider regarding FinEst link based on financing structure analysis

The main conclusions from the project financing structure

1. The objective in next phases of the project should be to improve the commercial viability and to maximise funding sources such as EU grants in order to gain a better understanding of financing models that can be employed for the project.

2. State contributions and public sector risk exposure should be at an acceptable level, but not too low, so that public total costs (cost of risk transfer) can be minimised.

3. Demand risk cannot be completely transferred to the private sector in any procurement model (unless the project scope is significantly changed to include elements outside the scope of this study). Revenue guarantee mechanisms can be used to manage credit risk and incentivise the system operator. The illustrative financing model and calculations in this report are based on parameters that would assume no or a low level of demand risk for the FinEst Link project operator.

4. The project will have an effect on the financing burden of the Estonian and Finnish states. The effect on the states debt position can possibly be mitigated using a PPP financing model combined with EU funds in a “blending” financing model.

5. It is generally considered that balance sheet treatment should not be a driving factor in determining the financing structure of a project. Off-balance sheet treatment can at some point in the project’s life cycle result in benefits that can make the project more feasible.

6. Several innovative financing options can be available and of interest for the FinEst project, including EU funding and different private equity and debt financing alternatives.

7. Financial market capacity will be a factor in the project and the large project size will require different types of financiers to co-operate in organising the project financing. Loan tenor and refinancing risks need to be accounted for in this very long-term project.

8. The model (contracting, financing) for the project should be carefully studied before decision making and in all cases market interest and capacity to carry out the project based to the model should be ensured by entering into sufficient market dialogue (contractors, planners,

50

investors, lenders, etc.). State aid issues should also be addressed by the local ministries in Estonia and Finland.


- The project is unique, and reliable estimates of the financing model are challenging to carry out as a desktop study. The model (contracting, financing) for the project should be carefully further studied before decision making.

- In next steps alternative financing structures should be further discussed with project owners, possible co-funders (public and private) and market participants.

- When one or several acceptable contract models have been identified, market interest and capacity to carry out the project should be ensured by entering into sufficient market dialogue during next phases of the project preparation process (contractors, planners, investors, lenders, etc.).

- A development phase –model (partnering, alliance) combined to a long-term service agreement/ concession could provide integration of design and construction at an early stage of the project.

- As the FinEst Link project develops, budgetary limitations for the project as a whole (Finland, Estonia, EU, others) must be evaluated in the overall financing structure and cash flow profile. The effect on state finances should also be considered before proceeding.

- During next steps of the FinEst Link –project the project owners should address the potential issue of State aid. The project can commence discussions with the European commission (DG COMP) and the relevant local ministries at an early phase of the project to minimise risks regarding state aid.

- EIB provides an advisory service (European investment advisory hub /EIAH), that could be engaged in order evaluate EU financing options (subsidies etc.) and find the most suitable EIB involvement in the project (e.g. debt and bond options).

51

5. Financial modelling

The goal of the Financial Model is to produce a preliminary business feasibility analysis on the base case business case and some defined scenarios. The model is designed so that main assumptions and results can efficiently be communicated to the project owners and decision makers.

The main outputs are the summary sheet, summarising the financial aspects of a scenario- and the graph outputs of the calculations.

- Sources and uses of funds (financial return for each of these)

- Presentation of cash flows and cover ratios during the life of the project

- Comparison of cash flow and liability to CBA calculation

The model can be generally seen as a high level model – where different scenarios can be evaluated to develop the project financing and business case (e.g. construction phase funding, alternative observation periods, interest rate alternatives, optimisation of profit distributions, etc.)

5.1. Business case description

5.1.1. Traffic estimations

Traffic estimations (passenger volumes, cargo and truck/shuttle volumes) are based on assumptions from the FinEst Link Comparative Impact Analysis Sub-Report and input from experts who have prepared the report

It has been assumed that 15 % of trips in the following ticket groups are carrying passenger car

o Work-related trips (from ferries)

o Business trips

o Leisure trips from ferries

o Other trips (visit etc.))

Both the passenger and cargo volumes are assumed not to grow after the year 2060.

52

Trip distribution Value Unit

new commuting trips 54 % % of total trips

work-related trips from ferries 12 % % of total trips

commuting to place of study 1 % % of total trips

business trips 14 % % of total trips

transit trips 8 % % of total trips

long distance trips via Rail Baltica 2 % % of total trips

leisure trips from ferries 3 % % of total trips

other trips (visit etc.) 5 % % of total trips

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M t

rip

s/y

Year

Passenger volumes

Passenger trips Passenger car volumes

- 500

1 0001 5002 0002 5003 0003 5004 0004 5005 000

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tho

usa

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ton

s

Year

Cargo volumes

Truck/shuttle train volume Cargo train volume

53

5.1.2. User charges and other income sources

User charges are based on assumptions from the FinEst Link Comparative Impact Analysis Sub-Report and input from experts who have prepared the report.

User charge Value Unit

Single trip price, train passenger, real price 18 EUR/trip

Frequent traveller discount 16,67 %

30 day card price real price 480 EUR/month

Average trips made with 30 day card per month real price 40 trips

Student discount on 30-day card 20 %

Long distance trips via Rail Baltica, real price 40 EUR/trip

Passenger car single trip 70 EUR/trip

Truck single trip rate 450 EUR/trip

Cargo train rate 150 EUR/train km

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EUR

/ t

rip

Year

Average ticket price

Average passenger trip price Average passenger car trip price

54

5.2. Financial analysis assumptions

5.2.1. Schedule

Schedule assumptions are based on the FinEst Link Cost estimation Sub-Report and input from experts who have prepared the report.

Schedule Value Unit

Construction period start 1.1.2025 date

Construction period length 15 years

Construction period ending 31.12.2039 date

Start of operating period 1.1.2040 date

Length of operating period 50 years

Capital expenditure schedule Value Unit

Share total of capital expenditure in year 1 5 % %















55

5.2.2. Capital and investment expenditure

Capital expenditure (Global project and how these are considered in the modelling, e.g. tunnel, rail infrastructure, rolling stock, etc.) assumptions are based on the FinEst Link Cost estimation Sub-Report and input from experts who have prepared the report.

Capital expenditure item (in 2017 values) Value Unit

Capital expenditure of tunnels 8 426 MEUR

Capital expenditure of FinEst on surface rail connections 217 MEUR

Capital expenditure of stations, terminals and depots 1 985 MEUR

Capital expenditure of rail technology and utility equipment 2 130 MEUR

Capital expenditure of material and management 465 MEUR

Capital expenditure of add-on costs 2 777 MEUR

Total capital expenditure in real prices including owners costs and risk

provisions 16 000 MEUR

5.2.3. Operational expenses assumptions

Operational expenses assumptions are based assumptions are based on the FinEst Link Cost estimation Sub-Report, Comparative Impact Analysis Sub-Report and input from experts (Sweco/WSP) who have prepared the reports.

Train demand is calculated with 10 million passenger trips and 20 million passenger trips and a linear relationship is assumed between 10 million and 20 million passenger trips

For cargo, it is assumed that 15 train sets are needed on the demand range 3.8 – 6.2 million tons.

-

5 000

10 000

15 000

20 000

-

500

1 000

1 500

2 000

2 500

2017

2019

2021

2023

2025

2027

2029

2031

2033

2035

2037

2039

2041

MEU

R

MEU

R

Year

Capex

Capex Cumulative capex (Right axes)

56

Overall operational expenditure is based on the FinEst Link Cost estimation Sub-Report discussions with experts from Sweco.

Rolling stock costs Value Unit

passenger train (dedicated for tunnel) cost per train 20 MEUR / pcs

car/truck shuttle trains (dedicated for tunnel) cost per train 13 MEUR / pcs

Rail based rolling stock for maintenance 2 MEUR

Wheel based rolling stock (AGV) 13 MEUR

Passenger train needs Value Unit

Lower volume limit of passenger train need in calculation 10 M trips/y

Upper volume limit of passenger train need in calculation 20 M trips/y

amount of passenger train (dedicated for tunnel) with lower volume

limit per year

20

pcs

amount of passenger train (dedicated for tunnel) with upper volume

limit per year

26

pcs

amount of car/truck shuttle trains (dedicated for tunnel) 15 pcs

Annualized preventive & corrective maintenance of rail based rolling

stock

50 % % of annualized

capital

expenditure

Annualized preventive & corrective maintenance of wheel based

rolling stock

20 % % of annualized

capital

expenditure

Energy and staff costs Value Unit

Energy consumption in train operational expenditure 850 MWh/day

Energy price 0,04 EUR/kWh

Average annual salary including all costs 80 TEUR / year

Amount of employees for operations 200 persons

Rail related in tunnel maintenance Value Unit

57

Track and power line replacement cost per unit 550 TEUR / pcs

Signalling replacement cost per unit 450 TEUR / pcs

Amount of track and power line 200 pcs

Amount of signalling 200 pcs

Additional cost of rail related equipment maintenance 25 % %

Non rail related in tunnel maintenance Value Unit

Replacement cost of non-rail equipment in tunnel per 100 years 1 000 MEUR

non-rail equipment in tunnel lifetime 100 years

Depots maintenance Value Unit

Depots investment cost 466 MEUR

Additional cost of depots maintenance 15 % %

Equipment, civil and building of underground railway stations maintenance

Value Unit

stations investment cost 171 MEUR

Additional cost of equipment, civil and building of underground

railway stations maintenance

20 %

%

Energy and staff costs in infrastructure maintenance Value Unit

Energy consumption compared to the train operational expenditure energy consumption

10 % %

Amount of employees (included in maintenance costs) 175 persons

Depreciation Value Unit

Depreciation, fixed assets (outlay residue write-off) 2 % %

Capital expenditure distribution in asset types, fixed assets 100 % %

58

Lifetimes Value Unit

Passenger trains (dedicated for tunnel) lifetime 25 years

Car/truck shuttle trains (dedicated for tunnel) lifetime 25 years

Rail based rolling stock for maintenance lifetime 25 years

Wheel based rolling stock (AGV) lifetime 10 years

Track and power line lifetime 10 years

Signalling replacement lifetime 25 years

Depots lifetime 25 years

Stations lifetime 30 years

-

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800

1 000

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2080

MEU

R

Year

Total costs

Trains and operation Infrastructure maintenance Debt Service (DS)

59

5.2.4. Revenues

Revenues are calculated based on the above-mentioned volume and user charge estimations and shown in the Figure below.

5.2.5. Inflation and interest rate

Inflation assumption is made separately for revenues, operational expenditure (OPEX) and capital expenditure (CAPEX). The inflation assumptions are shown in table below.

Inflation Value Unit

Inflation revenues 1 % % p.a.

Inflation capital expenditure 1 % % p.a.

Inflation capital expenditure 1 % % p.a.

Interest rate assumption is based on assumed margin and base interest rate assumption.

Interest rate Value Unit

Base interest rate 1,5 % % p.a.

Margin (depending on scenario) 0.5 – 2.0 % % p.a.

Total interest rate (depending on scenario) 2.0 – 3.5 % % p.a.

Tax assumptions are based on 20% corporate tax. Tax is paid based on the Finnish model, where taxes are paid at a corporate level. Value added tax is not considered in the calculations and all figures are calculated without VAT.

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Year

Revenue

revenues, passenger trips Revenues, passenger car

Revenues, trucks Revenues, cargo trains

60

5.2.6. Financing assumptions

The project financial calculations have been carried out for various scenarios shown in the Table below:

Finance assumption

Project cash

flow

Grant Grant +

public debt

Public debt

no EU grant

Grant +

private debt

Private debt

no EU grant

Commercial

financing

model

Grant (EU) 0 % 40 % 40 % 0 % 40 % 0 % 40 %

Equity of capital

expenditure after

grants before interest

during construction

100 % 100 % 0% 0 % 20 % 20 % 30 %

DSCR minimum

requirement

1,00 1,00 1,02 1,02 1,20 1,20 2,25

Margin 1,0 % 1,0 % 1,0 % 1,0 % 2,0 % 2,0 % 2,5 %

In addition, a High Capital expenditure scenario was constructed:

Finance assumption High capital expenditure

Scenario change in tunnel construction capital expenditure 30 %

Scenario change in surface rail connections capital expenditure 10 %

Scenario change in stations, terminals and depots capital expenditure 30 %

Scenario change in rail technology and utility equipment capital expenditure 15 %

Scenario change in material management capital expenditure 30 %

61

5.3. Results without grant financing

This scenario displays project cash flows based only on estimated project costs and project income without external funding or financing.

The project Net present value (NPV) discounted at 3,5% is € 8.419 bn negative.

There is no need for additional financing funding shortfall as the project is fully financed with equity (from Finland and Estonia) and there exists no financing deficit that needs to be covered. The operational surplus also shows, that there is capacity for debt service, which will be studied further later in this report in alternatives that include a capital structure.

This scenario assumes 100% equity financing for the project so Project IRR % and Equity IRR % are equal.

Scenario: Project cash flow without grants or financing structure2 025 2 029 2 034 2 039 2 040 2 044 2 049 2 054 2 059 2 064 2 069 2 074 2 079 2 084 2 089

1 5 10 15 16 20 25 30 35 40 45 50 55 60 65 Construction Operation

Investment cost - MEUR 18 602 796 829 2 240 663 - - - - - - - - - - - Grant (EU) - MEUR - - - - - - - - - - - - - - - - Grant (Finland & Estonia) - MEUR - - - - - - - - - - - - - - - - Equity input - MEUR 18 602 796 829 2 240 663 - - - - - - - - - - - Debt withdraw - MEUR - - - - - - - - - - - - - - - - Revenue - MEUR 34 609 - - - - 458 496 548 605 668 702 738 776 815 857 901 Operating costs - MEUR 9 984 - - - - 153 160 168 178 188 197 207 218 229 241 253 Financing costs - MEUR - - - - - - - - - - - - - - - - Taxes - MEUR 2 597 - - - - - - 14 29 45 55 65 74 83 93 102 Total equity cash flow - MEUR 3 426 (796) (829) (2 240) (663) 305 336 365 398 435 450 466 484 503 524 546

WACC 3,5 % Discounted equity cash flow - MEUR (8 419) (769) (698) (1 588) (396) 176 169 155 142 131 114 99 87 76 66 58

Equity cash flow - MEUR 3 426 (796) (829) (2 240) (663) 305 336 365 398 435 450 466 484 503 524 546 Supplement payment - MEUR - - - - - - - - - - - - - - - - Equity cash flow including supplement payment - MEUR 3 426 (796) (829) (2 240) (663) 305 336 365 398 435 450 466 484 503 524 546 Discounted equity CF with supplement payment - MEUR (8 419) (769) (698) (1 588) (396) 176 169 155 142 131 114 99 87 76 66 58

FRR including supplement payment 0,5 %

FINANCIAL PERFORMANCE INDICATORS

0,00

0,50

1,00

1,50

2,00

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200

400

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800

1 000

2017

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MEU

R

Year

Debt service

Interest Debt repayment

Cash Available for Debt Service (CADS) Debt Service Coverage Ratio (DSCR)

- 0 0 0 0 1 1 1 1 1 1

00000111111

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ve M

EUR

MEU

R

Year

Grants & additional funding

Supplement payment (FIN/EST) Grant (Finland & Estonia)

Equity (Finland & Estonia) Cumulative Fin / Est support (right axes)

(20 000)

(15 000)

(10 000)

(5 000)

-

(2 500)

(2 000)

(1 500)

(1 000)

( 500)

-

500

1 000

2017

2020

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2032

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R

Year

Equity IRR, 0,5 %

Equity cash flow Cumulative equity cash flow

(20 000)

(18 000)

(16 000)

(14 000)

(12 000)

(10 000)

(8 000)

(6 000)

(4 000)

(2 000)

-

(2 500)

(2 000)

(1 500)

(1 000)

( 500)

-

500

1 000

20

17

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Project IRR, 0,5 %

Project cash flow Cumulative project cash flow

62

When comparing the grant payments to the socio-economic and operational surplus of the system, the project does not seem feasible.

0

2000

4000

6000

8000

10000

12000

14000

16000

18000

1 4 7 10 13 16 19 22 25 28 31 34 37 40 43

Cumulative public costs and benefits

Culmulative discounted net benefits and operational surplus

Culmulative discounted net benefits (excl. FinEst Link revenues and costs)

Cumulative grants and supplement payments

Nominal grants and supplement payments

0

200

400

600

800

1000

1200

1400

1600

1800

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43

Grant and supplement payments vs. net benefits

Discounted Fin/Est grants + supplement payment

Discounted net benefits (excl. FinEst Link revenues and costs)

Discounted operational surplus

63

5.4. Results with grant financing

This scenario displays the project cash flows only based on estimated project costs with a 40 % (EU) grant and the rest of the project financed with € 11,16 bn of (public) equity capital.

Based on the analysis, the project NPV at 3,5% is negative (3.048 bn euros) after 40 % EU grant

financing.

Also in this scenario, the project does not have a yearly shortfall in funding. In addition, there are no

costs for debt service.

The scenario assumes 100% equity financing for the project cost that is not covered with grants so

Project IRR % and Equity IRR % are the same and show a slightly positive value in the very long term.

Scenario: EU Grant 40% of investment cost2 025 2 029 2 034 2 039 2 040 2 044 2 049 2 054 2 059 2 064 2 069 2 074 2 079 2 084 2 089


Investment cost - MEUR 18 602 796 829 2 240 663 - - - - - - - - - - - Grant (EU) - MEUR 7 441 318 331 896 265 - - - - - - - - - - - Grant (Finland & Estonia) - MEUR - - - - - - - - - - - - - - - - Equity input - MEUR 11 161 478 497 1 344 398 - - - - - - - - - - - Debt withdraw - MEUR - - - - - - - - - - - - - - - - Revenue - MEUR 34 609 - - - - 458 496 548 605 668 702 738 776 815 857 901 Operating costs - MEUR 9 984 - - - - 153 160 168 178 188 197 207 218 229 241 253 Financing costs - MEUR - - - - - - - - - - - - - - - - Taxes - MEUR 3 506 - - - - 16 26 39 52 66 74 81 89 97 105 113 Total equity cash flow - MEUR 9 958 (478) (497) (1 344) (398) 288 310 341 375 415 432 450 469 489 511 535

WACC 3,5 % Discounted equity cash flow - MEUR (3 048) (462) (419) (953) (237) 166 156 144 134 124 109 96 84 74 65 57

Equity cash flow - MEUR 9 958 (478) (497) (1 344) (398) 288 310 341 375 415 432 450 469 489 511 535 Supplement payment - MEUR - - - - - - - - - - - - - - - - Equity cash flow including supplement payment - MEUR 9 958 (478) (497) (1 344) (398) 288 310 341 375 415 432 450 469 489 511 535 Discounted equity CF with supplement payment - MEUR (3 048) (462) (419) (953) (237) 166 156 144 134 124 109 96 84 74 65 57



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R

Year

Debt service



- 0 0 0 0 1 1 1 1 1 1

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(15 000)

(10 000)

(5 000)

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(1 500)

(1 000)

( 500)

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500

1 000

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MEU

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Year

Equity IRR, 2 %


(12 000)

(10 000)

(8 000)

(6 000)

(4 000)

(2 000)

-

2 000

4 000

6 000

8 000

(1 500)

(1 000)

( 500)

-

500

1 000

20

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Project IRR, 2 %


64

With a 40 % EU grant the net value of project benefits and operational surplus would reach the level of the grants paid by Finland and Estonia over the long term. However the liability is very front loaded compared to the benefits that are presented. For this reason it could be motivated to find alternatives where the public exposure and risk is more aligned with the project’s (public) benefits and operational surplus. These models are studied further in the following sections of this report.

0

2000

4000

6000

8000

10000

12000

1 4 7 10 13 16 19 22 25 28 31 34 37 40 43

Cumulative public costs and benefits

Culmulative discounted net benefits and operational surplus

Culmulative discounted net benefits (excl. FinEst Link revenues and costs)

Cumulative grants and supplement payments

Nominal grants and supplement payments

0

200

400

600

800

1000

1200

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43

Grant and supplement payments vs. net benefits

Discounted Fin/Est grants + supplement payment

Discounted net benefits (excl. FinEst Link revenues and costs)

Discounted operational surplus

65

5.5. Results with grant and 100% public debt

This scenario displays the project cash flows based on estimated project costs with a 40 % (EU) grant and the rest of the project financed with 100 % public debt (approx. 13,250 bn €). This scenario displays the lowest possible cost alternative for the project if not built using direct loans from the Finnish and Estonian states (this publicly financed SPV model would not be an “off-balance sheet” -model in the sense of Eurostat debt accounting).

Based on the analysis, the project NPV at a 3,5% discount rate is 771 million euros negative over a 50

year operational period. Equity IRR % is not calculated as there is no equity investment. The NPV is

less negative compared to the models financed with a higher proportion of grants because the

negative and positive cash flows are evened out over the project period.

This scenario includes an element of national subsidy during the operational phase to be paid on a

yearly level. The cumulative subsidy would be approximately 4.75 billion euros over the analysis

period.

There is a funding shortfall and a “sculpted” yearly payment stream of approximately 170 million

euros (total 4.75 bn) over 50 year observation period) can be estimated as the minimum cost with

current demand estimates per year that Finland and Estonia would have to be prepared to

contribute for the project to be possible without making a substantial grant/equity investment in

the early phase of the project. This type of payment could be justified by presenting yearly

economic benefits of wider economic impacts that are above the yearly cost level.

Scenario: Public debt model + sculpted repayment2 025 2 029 2 034 2 039 2 040 2 044 2 049 2 054 2 059 2 064 2 069 2 074 2 079 2 084 2 089


Investment cost - MEUR 20 691 796 879 2 426 976 - - - - - - - - - - - Grant (EU) - MEUR 7 441 318 331 896 265 - - - - - - - - - - - Grant (Finland & Estonia) - MEUR - - - - - - - - - - - - - - - - Equity input - MEUR - - - - - - - - - - - - - - - - Debt withdraw - MEUR 13 250 478 547 1 530 711 - - - - - - - - - - - Revenue - MEUR 34 609 - - - - 458 496 548 605 668 702 738 776 815 857 901 Operating costs - MEUR 9 984 - - - - 153 160 168 178 188 197 207 218 229 241 253 Financing costs - MEUR 21 702 - - - - 465 477 493 512 533 557 583 614 648 (0) (0) Taxes - MEUR 2 065 - - - - - - - - 13 29 48 68 90 101 110 Total equity cash flow - MEUR 857 - - - - (160) (141) (114) (85) (65) (81) (100) (123) (152) 515 538

WACC 3,5 % Discounted equity cash flow - MEUR (771) - - - - (93) (71) (48) (30) (20) (20) (21) (22) (23) 65 57

Equity cash flow - MEUR 857 - - - - (160) (141) (114) (85) (65) (81) (100) (123) (152) 515 538 Supplement payment - MEUR 4 750 - - - - 170 150 124 95 76 92 112 136 165 - - Equity cash flow including supplement payment - MEUR 5 607 - - - - 9 10 10 10 11 11 12 12 13 515 538 Discounted equity CF with supplement payment - MEUR 780 - - - - 5 5 4 4 3 3 2 2 2 65 57

FRR including supplement payment N/A


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- 5001 0001 5002 0002 5003 0003 5004 0004 5005 000

020406080

100120140160180

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66

The public payment of 117 million euros could be justified by presenting yearly economic benefits

that are above the yearly cost level. Below a comparison of CBA socio-economic benefits and project

financial costs during the operations phase is presented59:

The publicly debt financed model presents benefits that are on a yearly level higher than the yearly

cost for the system so the project could be feasible for Finland and Estonia based on the yearly and

cumulative benefits exceeding the yearly subsidy payments.

From a budgeting perspective, the yearly payment level of 170 million euros can be compared with

the yearly subsidies to Helsinki Regional Transport (HSL) of 313.3 million euros (2017) or the public

transport costs of the city of Tallinn (estimated at 65 million euros).

Low revenue scenario with 80 % of projected revenues due to lower ticket/ freight prices or lower

than expected demand:

High capital expenditure scenario (see scenario input details in section 5.2.6 for details):

The low revenue scenario could result in an excess cost of 91 million euros per year and the high

capital expenditure scenario in approximately 129 million euros of extra cost per year.

59 Based on traditional CBA –analysis figures, i.e. possible Wider Economic Impacts (WEI) have not been accounted for in the analysis.

0

2000

4000

2025 2028 2031 2034 2037 2040 2043 2046 2049 2052 2055 2058 2061 2064 2067

Comparison of CBA benefits and supplement payments by Finland/Estonia, cumulative values

Cumulative CBA benefits (discounted @3,5 %, excl. passenger train operating costs and rail fare revenues)

Public debt model cumulative costs to FIN/EST (grants (investment phase) + supplement (operation phase), dsicounted @ 3,5 %)

Cumulative grants (investment phase) + supplement (operation phase) paid by Finland and Estonia (nominal)

0

20

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80

100

120

140

2025 2028 2031 2034 2037 2040 2043 2046 2049 2052 2055 2058 2061 2064 2067

Comparison of CBA benefits and supplement payments by Finland/Estonia, yearly values

CBA benefits (discounted @ 3,5%, excl. passenger train operating costs and rail fare revenue)

Public debt model costs to FIN/EST (grants (investment phase) + supplement (operation phase), discounted @ 3,5%)

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67

5.6. Results with 100% public debt and no grant

This scenario displays the project cash flows based on estimated project costs with no 0 % (EU) grant and the entire project financed with 100 % public debt (approx. 22.084 bn €). This scenario displays the lowest possible cost alternative for the project if not built using direct loans from the Finnish and Estonian states (this publicly financed SPV model would not be an on off-balance sheet model in the sense of Eurostat debt accounting) and no EU granst would be available.

Based on the analysis, the project NPV at a 3,5% discount rate is 5.061 billion euros negative over a

50 year operational period. Equity IRR % is not calculated as there is no equity investment.

This scenario includes an element of high national subsidy during the operational phase to be paid on

a yearly level. The annual subsidy would be 486 million euros at the start of the operation and the

cumulative subsidy would be approximately 18.9 billion euros over the analysis period.

Scenario: Public debt model with no EU grant2 025 2 029 2 034 2 039 2 040 2 044 2 049 2 054 2 059 2 064 2 069 2 074 2 079 2 084 2 089


Investment cost - MEUR 22 084 796 912 2 549 1 185 - - - - - - - - - - - Grant (EU) - MEUR - - - - - - - - - - - - - - - - Grant (Finland & Estonia) - MEUR - - - - - - - - - - - - - - - - Equity input - MEUR - - - - - - - - - - - - - - - - Debt withdraw - MEUR 22 084 796 912 2 549 1 185 - - - - - - - - - - - Revenue - MEUR 34 609 - - - - 458 496 548 605 668 702 738 776 815 857 901 Operating costs - MEUR 9 984 - - - - 153 160 168 178 188 197 207 218 229 241 253 Financing costs - MEUR 36 171 - - - - 775 795 822 853 888 928 972 #### #### 0 0 Taxes - MEUR 1 311 - - - - - - - - - - 8 38 72 87 97 Total equity cash flow - MEUR (12 857) - - - - (471) (459) (443) (426) (407) (422) (450) (503) (565) 529 551

WACC 3,5 % Discounted equity cash flow - MEUR (5 061) - - - - (271) (231) (188) (152) (122) (107) (96) (90) (85) 67 59

Equity cash flow - MEUR (12 857) - - - - (471) (459) (443) (426) (407) (422) (450) (503) (565) 529 551 Supplement payment - MEUR 18 898 - - - - 486 475 460 443 425 441 469 524 587 - - Equity cash flow including supplement payment - MEUR 6 041 - - - - 16 16 16 17 18 19 19 20 22 529 551 Discounted equity CF with supplement payment - MEUR 887 - - - - 9 8 7 6 5 5 4 4 3 67 59

FRR including supplement payment N/A


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-2 0004 0006 0008 00010 00012 00014 00016 00018 00020 000

0

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68

5.7. Results with grant and Public Private Partnership (PPP) -model

This scenario displays the project cash flows based on an example of a commercially financeable project with a 40 % (EU) grant and the rest of the project financed with 20 % private equity (approx. € 2.23 bn.) and 80% private debt (approx. € 11.36 bn.). This scenario displays required payment from the cities compared to the previous model that the project would have to generate to become commercially viable using private infrastructure financing with a low level of project risk for investors and lenders (e.g. demand).

Based on the analysis, the equity NPV at a 3,5% discount rate is 2.54 billion euros negative over a 50

year operational period.

This scenario includes an element of national subsidy during the operational phase to be paid on a

yearly level. There is a funding shortfall of approximately 280 million euros in the start of the

operational phase. The cumulative subsidy would be approximately 8.762 billion euros over the

analysis period.

Below a comparison of CBA socio-economic benefits and project financial costs during the operations

phase is presented60:

60 Based on traditional CBA –analysis figures, i.e. possible Wider Economic Impacts (WEI) have not been accounted for in the analysis.

Scenario: Private debt model + sculpted repayment2 025 2 029 2 034 2 039 2 040 2 044 2 049 2 054 2 059 2 064 2 069 2 074 2 079 2 084 2 089


Investment cost - MEUR 21 037 796 886 2 454 1 036 - - - - - - - - - - - Grant (EU) - MEUR 7 441 318 331 896 265 - - - - - - - - - - - Grant (Finland & Estonia) - MEUR - - - - - - - - - - - - - - - - Equity input - MEUR 2 232 96 99 269 80 - - - - - - - - - - - Debt withdraw - MEUR 11 363 382 455 1 289 692 - - - - - - - - - - - Revenue - MEUR 34 609 - - - - 458 496 548 605 668 702 738 776 815 857 901 Operating costs - MEUR 9 984 - - - - 153 160 168 178 188 197 207 218 229 241 253 Financing costs - MEUR 21 961 - - - - 487 495 507 521 538 558 582 611 644 0 0 Taxes - MEUR 1 854 - - - - - - - - - 17 37 61 88 101 109 Total equity cash flow - MEUR (1 423) (96) (99) (269) (80) (182) (159) (128) (94) (58) (71) (89) (114) (146) 515 538

WACC 3,5 % Discounted equity cash flow - MEUR (2 540) (92) (84) (191) (47) (105) (80) (54) (34) (17) (18) (19) (20) (22) 65 58

Equity cash flow - MEUR (1 423) (96) (99) (269) (80) (182) (159) (128) (94) (58) (71) (89) (114) (146) 515 538 Supplement payment - MEUR 8 762 - - - - 280 258 230 199 165 182 205 236 275 - - Equity cash flow including supplement payment - MEUR 7 339 (96) (99) (269) (80) 97 99 101 104 108 112 116 122 129 515 538 Discounted equity CF with supplement payment - MEUR 309 (92) (84) (191) (47) 56 50 43 37 32 28 25 22 19 65 58



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-1 0002 0003 0004 0005 0006 0007 0008 0009 00010 000

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69

The PPP model results in an additional cost that is slightly higher than the CBA net benefits calculated

for the project. Over the long term the cumulative net benefits are higher than the costs. The

additional cost of private financing could be justified e.g. based on state budgetary restrictions or risk

transfer to a private project developer.

Low revenue scenario with 80 % of projected revenues due to lower ticket/ freight prices or lower

than expected demand:

High capital expenditure scenario (see scenario input details in section 5.2.6 for details):

The low revenue scenario could result in an excess cost of 91 million euros per year and the high

capital expenditure scenario in approximately 159 million euros of extra cost per year. The private

financing model could provide some protection from the capital expenditure escalation if the cost

increase would be due to risks that have been transferred to project contractors.

0

2000

4000

6000

8000

2025 2028 2031 2034 2037 2040 2043 2046 2049 2052 2055 2058 2061 2064 2067

Comparison of CBA benefits and supplement payments by Finland/Estonia, cumulative values

Culmulative CBA net benefits (discounted @3,5 %, excl. passenger train operating costs and rail fare revenues)

Private debt model cumulative costs to FIN/EST (grants (investment phase) + supplement (operation phase), discounted @ 3,5 %)

Cumulative grants (investment phase) + supplement (operation phase) paid by Finland and Estonia (nominal)

0

20

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80

100

120

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160

180

2025 2028 2031 2034 2037 2040 2043 2046 2049 2052 2055 2058 2061 2064 2067

Comparison of CBA benefits and supplement payments by Finland/Estonia, yearly values

Discounted (@ 3,5%) net benefits (excl. passenger train operating costs and rail fare revenue)

Private debt model costs to FIN/EST (grants (investment phase) + supplement (operation phase), discounted @ 3,5%)

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-2 0004 0006 0008 00010 00012 00014 00016 000

050

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70

5.8. Results with PPP model and no grant

This scenario displays the project cash flows on an example of a commercially financeable project with no (EU) grant and the entire the project financed with 20 % private equity (approx. € 3.72 bn.) and 80% private debt (approx. € 18.934 bn.). This scenario displays required payment from the cities so that the project would become commercially viable using private infrastructure financing with a low level of project risk for investors and lenders (e.g. demand) and with no EU grants.

Based on the analysis, the project NPV at a 3,5% discount rate is 8.070 billion euros negative over a

50 year operational period. The equity IRR would be 3.6 % for the 3.7 billion euro equity investment.

This scenario includes a high level of national subsidies to be paid on a yearly level during the

operational phase. The annual subsidy would be 669 million euros at the start of the operation and

the cumulative subsidy would be approximately 25.816 billion euros over the analysis period.

Scenario: Private debt model with no EU grant2 025 2 029 2 034 2 039 2 040 2 044 2 049 2 054 2 059 2 064 2 069 2 074 2 079 2 084 2 089


Investment cost - MEUR 22 659 796 924 2 597 1 285 - - - - - - - - - - - Grant (EU) - MEUR - - - - - - - - - - - - - - - - Grant (Finland & Estonia) - MEUR - - - - - - - - - - - - - - - - Equity input - MEUR 3 720 159 166 448 133 - - - - - - - - - - - Debt withdraw - MEUR 18 939 637 758 2 149 1 153 - - - - - - - - - - - Revenue - MEUR 34 609 - - - - 458 496 548 605 668 702 738 776 815 857 901 Operating costs - MEUR 9 984 - - - - 153 160 168 178 188 197 207 218 229 241 253 Financing costs - MEUR 36 602 - - - - 812 825 845 869 897 931 971 #### #### 0 0 Taxes - MEUR 1 191 - - - - - - - - - - - 27 69 86 96 Total equity cash flow - MEUR (16 889) (159) (166) (448) (133) (507) (489) (466) (442) (417) (426) (440) (487) (556) 530 552


Equity cash flow - MEUR (16 889) (159) (166) (448) (133) (507) (489) (466) (442) (417) (426) (440) (487) (556) 530 552 Supplement payment - MEUR 25 816 - - - - 669 655 635 616 596 612 634 690 771 - - Equity cash flow including supplement payment - MEUR 8 927 (159) (166) (448) (133) 162 165 169 174 179 186 194 204 215 530 552 Discounted equity CF with supplement payment - MEUR 101 (154) (140) (318) (79) 94 83 72 62 54 47 41 36 32 67 59



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0100200300400500600700800900

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71

5.9. Commercially financiable project

This scenario displays the project cash flows based on an example of a commercially financeable project with a 40 % (EU) grant and the rest of the project financed with 30 % private equity (approx. € 3.35 bn.) and 70% private debt (approx. € 10.3 bn.). This scenario displays required extra (external income that the project would have to generate to become commercially viable.

Based on the analysis, the equity NPV at a 3.5% discount rate is 3.243 billion euros negative over a 50

year operational period and 6.393 billion euro posivite after supplelement payments. The financial

internal rate of return (IRR %) is estimated at around 9.7%, which could be sufficient for a private

investor to accept some commercial risk in the project.

Based on the estimate, an extra yearly income of approximately 866 million euros per year would be

required to make the project perform at this level.

Scenario: Equity IRR Speculative2 025 2 029 2 034 2 039 2 040 2 044 2 049 2 054 2 059 2 064 2 069 2 074 2 079 2 084 2 089


Investment cost - MEUR 21 086 796 886 2 458 1 048 - - - - - - - - - - - Grant (EU) - MEUR 7 441 318 331 896 265 - - - - - - - - - - - Grant (Finland & Estonia) - MEUR - - - - - - - - - - - - - - - - Equity input - MEUR 3 348 143 149 403 119 - - - - - - - - - - - Debt withdraw - MEUR 10 297 334 406 1 158 664 - - - - - - - - - - - Revenue - MEUR 34 609 - - - - 458 496 548 605 668 702 738 776 815 857 901 Operating costs - MEUR 9 984 - - - - 153 160 168 178 188 197 207 218 229 241 253 Financing costs - MEUR 20 809 - - - - 520 520 520 520 520 520 520 520 520 0 0 Taxes - MEUR 1 882 - - - - - - - - 1 19 39 62 88 101 109 Total equity cash flow - MEUR (1 415) (143) (149) (403) (119) (215) (184) (141) (93) (40) (34) (29) (25) (22) 516 538


Equity cash flow - MEUR (1 415) (143) (149) (403) (119) (215) (184) (141) (93) (40) (34) (29) (25) (22) 516 538 Supplement payment - MEUR 29 257 - - - - 866 834 791 743 690 684 679 675 673 - - Equity cash flow including supplement payment - MEUR 27 842 (143) (149) (403) (119) 650 650 650 650 650 650 650 650 650 516 538 Discounted equity CF with supplement payment - MEUR 6 393 (138) (126) (286) (71) 375 327 275 232 195 164 138 116 98 65 58



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20 000

25 000

( 600)

( 400)

( 200)

-

200

400

600

800

2017

2020

2023

2026

2029

2032

2035

2038

2041

2044

2047

2050

2053

2056

2059

2062

2065

2068

2071

2074

2077

2080

MEU

R

Year

Equity IRR, 9,7 %


(12 000)

(10 000)

(8 000)

(6 000)

(4 000)

(2 000)

-

2 000

4 000

6 000

8 000

(1 500)

(1 000)

( 500)

-

500

1 000

20

17

20

20

20

23

20

26

20

29

20

32

20

35

20

38

20

41

20

44

20

47

20

50

20

53

20

56

20

59

20

62

20

65

20

68

20

71

20

74

20

77

20

80

MEU

R

Year

Project IRR, 2 %


72

The level of 866 MEUR per year of extra income (as subsidies or from other sources of income) can

be seen as a (minimum) level at which a private investor would be willing to assume commercial

risk of the project. This type of extra income that would make project commercially feasible could

be possible to realise e.g. if the artificial islands could be commercially exploited to generate high

levels of additional profits. If there would be no EU grant the yearly level of required additional

income could be approximately 1 646 MEUR.

5.10. Summary of financial and economic analysis

The effects of alternative financing models and debt periods on the estimated subsidy levels are

presented in the table below:

40 years debt period Public subsidy Cumulative subsidy

year 1 of operations (nominal) over 40 years period (nominal)

Public debt scenario 170 M€ 4 750 M€

Public debt, no EU grant 486 M€ 18 898 M€

PPP/Private debt scenario 280 M€ 8 762 M€

PPP/Private debt, no EU grant 669 M€ 25 816 M€

50 years debt period Public subsidy Cumulative subsidy

year 1 of operations (nominal) over 50 years period (nominal)

Public debt scenario 98 M€ 1 994 M€

Public debt, no EU grant 367 M€ 17 776 M€

PPP/Private debt scenario 218 M€ 7 243 M€

PPP/Private debt, no EU grant 566 M€ 26 956 M€

From the perspective of Finland and Estonia, the public subsidy could be justified by presenting

socio-economic and wider benefits that are above that of the subsidy level. A comparison of CBA

benefits and discounted subsidy payments during the operations phase is presented61 in Figure 15

below.

61 The CBA -analysis includes traditional CBA –analysis figures, possible Wider Economic Impacts (WEI) have not been accounted for in the analysis.

0

20

40

60

80

100

120

140

160

180

2034 2037 2040 2043 2046 2049 2052 2055 2058 2061 2064 2067

MEU

R

Comparison of yearly estimated CBA and WEI benefits and subsidy payments by Finland/Estonia during operation phase

CBA benefits (discounted @ 3,5%, excl. passenger train operating costs and rail fare revenue)

Public debt model costs to FIN/EST (grants (investment phase) + supplement (operation phase), discounted @ 3,5%)

Private debt model costs to FIN/EST (grants (investment phase) + supplement (operation phase), discounted @ 3,5%)

73

The yearly public payments are in line with local Finnish and Estonian public benefits of the project.

The EU grant (modelled at 40%) should be motivated by European added value e.g. wider economic

impacts, integration of the European transport area, improvements in accessibility and other policy

goals associated with the development of the EU transport network.

The cumulative figures presented in the figure below also show that the FinEst Link tunnel could in

this way be motivated based on the cumulative benefits to Finland and Estonia exceeding the yearly

discounted subsidy payments.

The presented model is sensitive to changes e.g. in revenues and costs. Some variations are

presented in the table below:

Revenue and Capital expenditure scenarios

Public subsidy Cumulative subsidy

(40 % grant assumption) year 1 of operations (nominal)

over 40 years period (nominal)

Public debt, low revenue 261 M€ 9 354 M€

Public debt, high capital expenditure 299 M€ 10 459 M€

Public debt, double operational expenditure

323 M€ 11 546 M€

Public debt, 0% inflation 167 M€ 7 515 M€

PPP/Private debt, low revenue 371 M€ 13 465 M€

PPP/Private debt, high capital expenditure

439 M€ 15 663 M€

PPP/Private debt, double operational expenditure

433 M€ 15 694 M€

PPP/Private debt, 0% inflation 262 M€ 11 091 M€

0

2000

4000

2025 2028 2031 2034 2037 2040 2043 2046 2049 2052 2055 2058 2061 2064 2067

MEU

R

Comparison of cumulative CBA benefits and subsidy payments by Finland/Estonia

Cumulative CBA benefits (discounted @3,5 %, excl. passenger train operating costs and rail farerevenues)Public debt model cumulative costs to FIN/EST (discounted @ 3,5 %)

Private debt model cumulative costs to FIN/EST (discounted @ 3,5 %)

74

5.11. Issues to consider regarding FinEst link based on the financial feasibility analyisis

1. A project such as the Helsinki – Tallinn tunnel cannot be easily financed with a fully private

funding model with demand risk transferred to private parties based on current project

revenue and cost estimates without outside sources of project funding or credit support.

2. The project could be financed with a publicly supported debt-financing model with subsidy payments of approximately 170 million euros per year from the beginning of the operational period, adding up to 4.8 bn euro subsidy payments.

3. An availability based private financing model (low level of risk transfer, no payments from Finland & Estonia before operational phase) could be feasible with a yearly service payment/ subsidy starting at approximately 280 million euros per year during the operational period.

4. Sensitivities show that various risks such as lack of grants or lower than expected revenues and higher than expected capital expenditures will have a significant effect on the cost to the public project owners and to the comparison of public benefits and costs.

5. A fully commercially financed model would require extra income from parts of the project that have not been accounted for in this study. An example of this type of income could be the commercial use of the planned artificial islands.

6. Comparing project costs and benefits (socio-economic, wider impacts) on a yearly level could motivate the feasibility of the project and public support to it. Further analysis of risk, benefits and wider economic impacts of the project would make this analysis more dependable for decision making purposes.

Key assumptions affecting the financial model estimation that should still be studied and revised.

- The assumed capital expenditure can be regarded as low when comparing to benchmark tunnels.

- The assumed passenger volumes and revenues need to be further studied and revised. Demand levels and income can be regarded as high when comparing to benchmark tunnels.

- The assumed operational expenditure is low when comparing for example to Finnish Transport Agency standards.

a. The link between the volumes and operational expenditure should be modelled / simulated in more detail during further, more detailed project phases.

b. It should also be noted that the EBITDA % per revenue increases in the model year by year, at the start of operation the EBITDA % is assumed to be 66 % and during the 50 years operation period it is assumed to increase to a level of 71 %. A more stable level of profit margin could be a more realistic assumption in the long term.

- The interest rate is assumed to be constant in the range of 2.0 – 3.5 % per year depending on the financial structure, which can be considered conservative/ low compared to historical market conditions.

- Factors affecting revenues and costs should be further studied so that decisions to proceed

with the project are based on risks that are in fact acceptable to the project partners.

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6. Conclusions

The FinEst Link tunnel project is truly a mega-project with an estimated feasibility study phase

investment cost of 16 billion euros (2017 prices). The benchmarking analysis shows that similar

infrastructure projects have been and can be realised from a technical and economical perspective.

However, projects have often been affected by risks resulting in cost overruns, delays and lower than

estimated social or financial returns. Estimated demand levels for the FinEst Link tunnel are lower

than in comparable projects, which should be accounted for in the project technical design and

financing structure.

Various financing alternatives have been studied and discussed as part of the study and some general

conclusions can be drawn:

Demand risk will be difficult to absorb by any other party than the public project owners.

Investor and financier interest will depend on credit and funding support from outside the

project, i.e. the project owners Finland and Estonia and other public stakeholders.

A “blending” financing structure, using a combination of EU funds and private and public

long-term financing combined to local public funding support can be achievable and feasible.

The financing and contract structure of the project must be able to account for the large

amounts of financing that have to be mobilised.

The large project size can lead to challenges related to financial market capacity or

restrictions in Finnish and Estonian willingness to accept debt liabilities and exposure to

project risks.

Project financial and social goals and limits should be set in a transparent manner in advance

for the full project and the project should ensure sufficient financial market dialogue during

its various phases of development.

The future sources of finance of the project will depend on the project’s characteristics (to be determined by project owners) and the characteristics of available financing in the market (depending on prevailing market conditions at each time). On a general level, the market for infrastructure financing is currently quite active and a financing arrangement even for a project of this size should be achievable if the contract terms are “bankable”, taking into account e.g. demand risk and uncertainties regarding reaching the final design and target cost of the project.

The project is most financially feasible when financed with a combination of EU grants and long-

term financing backed by a public transportation support payment (subsidy or availability based)

over the long term. A privately financed PPP model could be available with a subsidy payment

starting at 280 M€ per year, and a public model with lower costs but increased risks for the public

sector could be estimated to require a subsidy starting at 170 M€ per year.

76

With the presented financing structures and an estimated level of 40 % EU grants shows that the

project cost to Finland and Estonia could be motivated with the project’s estimated long term socio-

economic benefits:

A contract model combining elements from partnering/alliancing contracting models and private

financing models could facilitate the management of project costs and incentives. An open-book

development and contracting model with target pricing would also provide a shield against financial

risks to the project sponsors (Finland and Estonia) and future financiers and investors.

In practice, the next step could be to form a development vehicle, for example in the form of a

publicly owned limited liability company. This vehicle would be set up to further advance the project

based on the social and financial goals set by the project owners. The work should then proceed to

develop the Helsinki – Tallinn tunnel project within set limits, such as the target price, investment

and operation cost risk, cash flow, credit rating and ratio of project costs to estimated benefits. Over

the long term, this co-operative model should facilitate the joining of additional project partners to

form an overall structure with sufficient information and financial resources to implement the

project when socio-economic and financial boundary values are met with a sufficient level of

confidence.

0

2000

4000

2025 2028 2031 2034 2037 2040 2043 2046 2049 2052 2055 2058 2061 2064 2067

MEU

R

Comparison of cumulative CBA benefits and subsidy payments by Finland/Estonia

Cumulative CBA benefits (discounted @3,5 %, excl. passenger train operating costs and rail farerevenues)Public debt model cumulative costs to FIN/EST (discounted @ 3,5 %)

Private debt model cumulative costs to FIN/EST (discounted @ 3,5 %)

77

7. Summary of results and issues to consider in further project phases

7.1. Benchmarking results and issues to consider

The main conclusions from the benchmark are the following

1. The FinEst Link has lower projections for the combined freight and passenger demands than the compared projects. As a result, the expected revenues are lower.

2. The demand for FinEst is largely based on the commuting market, which does not yet exist at the level of the demand estimates, while the peer projects tap into existing markets.

3. The projected cost for FinEst link is lower than for peers. Given the fact that similar construction technologies are used, it is possible that the cost could be higher/ in the range of peers.

4. Benchmark projects indicate cost increases between feasibility study and project finish of a factor 0.5 to 6 in the compared projects with no experiences of reducing costs after construction start.

5. Several alternative financing and funding options are available which have shown their value and can be of interest for the FinEst project.


- Role of freight both by shuttle trains as well as normal freight trains.

- Evaluated projects benefits mainly flow to Estonia. Should Finland benefit more of the project taking into account Finland’s geographic location and Rail Baltica?

- Phasing of tunnel construction/ single track model could facilitate significant cost savings and risk reduction – first only one tunnel and hourly connection and development of system as there is growth – we propose that especially the cost-benefit aspects of this alternative be studied further (cf. also to annex 2).

7.2. Financing model analysis and issues to consider

The main conclusions from the project financing model analysis

1. The objective in next phases of the project should be to improve the commercial viability and to maximise funding sources such as EU grants in order to gain a better understanding of financing models that can be employed for the project.

2. State contributions and public sector risk exposure should be at an acceptable level, but not too low, so that public total costs (cost of risk transfer) can be minimised.

3. Demand risk cannot be completely transferred to the private sector in any procurement model (unless the project scope is significantly changed to include elements outside the scope of this

78

study). Revenue guarantee mechanisms can be used to manage credit risk and incentivise the system operator. The illustrative financing model and calculations in this report are based on parameters that would assume no or a low level of demand risk for the FinEst Link project operator.

4. The project will have an effect on the financing burden of the Estonian and Finnish states. The effect on the states debt position can possibly be mitigated using a PPP financing model combined with EU funds in a “blending” financing model.

5. It is generally considered that balance sheet treatment should not be a driving factor in determining the financing structure of a project. Off-balance sheet treatment can at some point in the project’s life cycle result in benefits that can make the project more feasible.

6. Several innovative financing options can be available and of interest for the FinEst project, including EU funding and different private equity and debt financing alternatives.

7. Financial market capacity will be a factor in the project and the large project size will require different types of financiers to co-operate in organising the project financing. Loan tenor and refinancing risks need to be accounted for in this very long-term project.

8. The model (contracting, financing) for the project should be carefully studied before decision making and in all cases market interest and capacity to carry out the project based to the model should be ensured by entering into sufficient market dialogue (contractors, planners, investors, lenders, etc.). State aid issues should also be addressed by the local ministries in Estonia and Finland.


- The project is so unique that reliable estimates of the financing model are difficult to carry out as a desktop study. The model (contracting, financing) for the project should be carefully further studied before decision making.

- In all financing models, market interest and capacity to carry out the project should be ensured by entering into sufficient market dialogue (contractors, planners, investors, lenders, etc.).

- A development phase –model (partnering, alliance) combined to a long-term service agreement/ concession could provide integration of design and construction at an early stage of the project.

- As the FinEst Link project develops, budgetary limitations for the project as a whole (Finland, Estonia, EU, others) must be evaluated in the overall financing structure and cash flow profile. The effect on state finances should also be considered before proceeding.

- During next steps of the FinEst Link –project the project owners should address the potential issue of State aid. The project can commence discussions with the European commission (DG COMP) and the relevant local ministries at an early phase of the project to minimise risks regarding state aid.

- EIB provides an advisory service (European investment advisory hub /EIAH), that could be engaged in order evaluate EU financing options (subsidies etc.) and find the most suitable EIB involvement in the project (e.g. debt and bond options).

79

7.3. Financial feasibility of the project and issues to consider

1. A project such as the Helsinki – Tallinn tunnel cannot be easily financed with a fully private

funding model with demand risk transferred to private parties based on current project

revenue and cost estimates without outside sources of project funding or credit support.

2. The project could be financed with a publicly supported debt-financing model with subsidy payments of approximately 170 million euros per year from the beginning of the operational period, adding up to 4.8 bn euro subsidy payments.

3. An availability based private financing model (low level of risk transfer, no payments from Finland & Estonia before operational phase) could be feasible with a yearly service payment/ subsidy starting at approximately 280 million euros per year during the operational period.

4. Sensitivities show that various risks such as lack of grants or lower than expected revenues and higher than expected capital expenditures will have a significant effect on the cost to the public project owners and to the comparison of public benefits and costs.

5. A fully commercially financed model would require extra income from parts of the project that have not been accounted for in this study. An example of this type of income could be the commercial use of the planned artificial islands.

6. Comparing project costs and benefits (socio-economic, wider impacts) on a yearly level could motivate the feasibility of the project and public support to it. Further analysis of risk, benefits and wider economic impacts of the project would make this analysis more dependable for decision making purposes.

Key assumptions affecting the financial model estimation that should still be studied and revised.

- The assumed capital expenditure can be regarded as low when comparing to benchmark tunnels.

- The assumed passenger volumes and revenues need to be further studied and revised. Demand levels and income can be regarded as high when comparing to benchmark tunnels.

- The assumed operational expenditure is low when comparing for example to Finnish Transport Agency standards.

c. The link between the volumes and operational expenditure should be modelled / simulated in more detail during further, more detailed project phases.

d. It should also be noted that the EBITDA % per revenue increases in the model year by year, at the start of operation the EBITDA % is assumed to be 66 % and during the 50 years operation period it is assumed to increase to a level of 71 %. A more stable level of profit margin could be a more realistic assumption in the long term.

- The interest rate is assumed to be constant in the range of 2.0 – 3.5 % per year depending on the financial structure, which can be considered conservative/ low compared to historical market conditions.

- Factors affecting revenues and costs should be further studied so that decisions to proceed

with the project are based on risks that are in fact acceptable to the project partners.

80

8. ANNEX 1 Indexing

To make costs comparable in benchmarks, indexing is the normal methodology. Several indices exist and several ways of applying them. A property of indices is that they are based on a significant amount of very comparable examples, often over a certain amount of time. Without these 2 properties, an index can be influenced too much by small differences. It is therefore, that an “international tunnel index” for multiple countries is not available since the amount of projects per year per country is not large enough to supply sufficient and stable results.

A standardized price level needs to be defined in order to be able to compare the costs. As this benchmark is made for the FinEst Link project, this price level is defined as “2016 Finland euros”. In order to translate the costs to this price level, two steps are followed. First, the costs are translated from their base level to 2016 price level in local currency using the consumer price index (CPI) provided by the OECD. Secondly, the costs are translated from local currency to the Finland euro using purchasing power parity (PPP), also provided by the OECD.

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9. ANNEX 2 Alternative timetable for fixed link

Since both the demand profile is different from the peer projects in the benchmark, also the offer (amount of trains and train frequencies) could be topic of further study. An example can be found in the following figures

Figure 1 Hourly pattern with 1 passenger and 2 shuttle trains with a single track in the part of the tunnel between artificial island 1 and 2

Figure 2 Half hourly passenger train intervals without freight or shuttles (for example during rush hour) with a single track in the part of the tunnel between artificial island 1 and 2

These kind of optimisations allow to significantly reduce the amount of capital expenditure need

upfront and make it possible to make investments based on the profit that the tunnel will make

when it is in use.

This idea of not creating a tunnel immediately with full double track is not new.

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Figure 3 Lötschberg base tunnel in Switzerland with partially single track and partially double track, in service since 2007

The Swiss Lötschberg base tunnel is in use since 2007 between the cantons of Bern (left in the figure)

and Valais (right) with 1/3 double track and 2/3 single track (yellow). Part of the second tube, some

cross-overs and an extra exit (on the right) have been excavated already, but not equipped with any

systems other than lighting (green). A last part of the tunnel (missing part at the left of the drawing)

still has to be excavated. Currently, the installation of track and systems in the green part is being

engineered, since the tunnel is currently, 10 years after opening, used at capacity

Lötschberg base tunnel and Gotthard base tunnel projects started at the same time and shared one

budget. When the Gotthard base tunnel costs increased, the Lötschberg base tunnel project was

reduced to only 1/3 double track.

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