The first design-build-finance-transfer (DBFT) rail scheme in the UK has closed. Unlike a conventional PPP structure, the Evergreen II project does not entail an operating concession. The project involves a DBFT contract in three phases: the construction of two new platforms at Marylebone Station, London, signalling work, and some track realignment at Beaconsfield.

Carillion won a competitive tender that was conducted by Laing Rail on behalf of Chiltern Railways. Laing acted as procurement agent for its subsidiary Chiltern, which has committed to carry out the project in its franchise agreement with the Strategic Rail Authority (SRA).

The special purpose vehicle, Evergreen II, is supported by £87 million ($163.4 million) in 4.5-year debt with a pre-payment option after 22 months, solely arranged by Sumitomo Mitsui Banking Corporation (SMBC) but no equity. Construction is scheduled to be complete in less than two years.

Carillion, RBC, financial adviser, and SMBC, arranger, have spent considerable time forming this new financing structure, and have kept the inner workings of the deal vague. Most construction financings involve an element of pre-financing, with monies disbursed on the attainment of specified construction milestones.

The structure is similar to the private construction of public works legislation enacted under EU law ? Italy, for instance, has directly implemented this law within its general contractor provisions. (Search ?Salerno? for a deal analysis of the first Italian GC scheme, on www.projectfinancemagazine.com). Australia has also adopted a DBFT model for a number of PPP projects.

Despite the relative simplicity of DBFT, Evergreen II is the first time a construction-only PPP structure has been used for a UK rail project.

Given the multiple stakeholders in rail infrastructure in the UK, a number of advisers were used in the deal. The tri-party tendering authority, each signatories to the project documents, Laing Rail, Network Rail and the Strategic Rail Authority (SRA) received legal counsel from Linklaters, Lovells, and Eversheds respectively.

SMBC was advised by CMS Cameron McKenna, and the SPV by Ashurst. SMBC also received technical advice from Halcrow Rail and insurance advice from Heath Lambert. Investec provided financial advice to Laing Rail.

Participants on the deal are wary about discussing bank fees and contractor margins, as well as other financing and advisory costs. But the difference between the figure of £80 million investment in rail quoted by Network Rail and the £87 million debt raised would suggest that such considerations may be equivalent to around 9% of total project costs.
When the project is complete and Network Rail has paid the SPV, it will become part of Network Rail's asset base ? Network Rail has overall responsibility for track maintenance. Chiltern Railways, the franchise owner owned by Laing Rail, will then pay Network Rail an additional track access charge for use of the new infrastructure.

As always with PPPs, the public side mantra ? best value for money ? bites at the heels of bankers. Was it achieved? Difficult to say. Without all the figures, margin and fees, it is impossible to compute. Network Rail could have traditionally procured the infrastructure by directly contracting out the work to the private sector. The upside of the deal is that greater risk is borne by the private sector, there is greater scope for innovation in design, and the capital cost is spread over a number of years.

Asked what are the advantages of DBFT over contracting out directly, a spokesperson for the Strategic Rail Authority (SRA) said: ?The answer centres in risk transfer. Under the Evergreen project the output risk and the delivery risk are separated and allocated to those entities best able to manage them. Chiltern takes the risk that the outputs will be delivered on time and meet the expected specification. The SRA chose to buy the outputs because they contributed to government transport policy and were assessed as being value for money after a cost/benefit analysis.

?Unlike traditional PFI projects where the contractor is responsible for ongoing repairs, maintenance and renewals, under Evergreen the new assets will be fully integrated into the existing railway infrastructure and will therefore be operated, maintained and renewed by Network Rail (NR).?

Laing has recently been successful at extracting large profits from PPP projects, and in this deal it both owns the franchise company and acted as procurement agent. Nevertheless, this deal could provide a template for future projects, could shave costs, especially if its documentation can be standardised, and provide a new tool for rail investment.

Evergreen II
Status: Closed 17 December
Size: £87 million 100% debt financed
Location: UK
Description: Involves the DBFT of track and signalling work s to upgrade the Chiltern Line and two new platforms at Marylebone Station
Stakeholders: Network Rail; Strategic Rail Authority; Laing Rail
Constructor: Carillion
Lead arranger: SMBC
Project financial adviser:
RBC Capital Markets
Financial adviser to Laing Rail: Investec
Project legal adviser: Ashurst
Legal advisers to stakeholders: Linklaters (Laing Rail); Lovells (Network Rail); Eversheds (SRA)
Legal adviser to the lenders: CMS Cameron McKenna
Technical adviser to the lender: Halcrow Rail
Insurance adviser to the lender: Heath Lambert