Modelling of High Speed Rail: A Case Study

High Speed 1, UK.

The story

HS1 valuation: £ 2.1bn

The High Speed 1 (‘HS1’) rail infrastructure project is a rail franchise running for 30 years to 2040, and one of the largest to be procured in the UK in terms of capital expenditure.

The concession includes the operation and management of 68 miles of high-speed rail line from London to the Channel Tunnel and the four stations en route: St Pancras, Stratford, Ebbsfleet and Ashford.

The project was completed on time in 2007 and has been operating successfully since then, offering a key link between London, Paris and Brussels.  

HS1 (www.highspeed1.co.uk) is used every year by over 9 million international and by over 5 million domestic passengers.  It earns most of its revenues from track access charges under a framework that allows it to receive an inflation-adjusted income stream and recover its operating and maintenance costs from train operating companies.

Approximately 60 percent of revenue is earned from domestic track access charges for high-speed services operating between London and southeast England and the remaining 40 percent is earned from international services currently operating from London, Paris and Brussels. The UK Government underwrites 90–95% of domestic revenues.

The challenge

In 2010 HS1 is a new company, and there is a lack of a common language, both internally and with the new investors, lenders and the rail regulator.

HS1 also has a complicated operational structure, as is normal for a regulated business.  Rail franchise modelling also requires a 13-period annual subdivision, as opposed to 12 months.

Partly due to the acquisition and partly due to the nature of large, regulated entities, HS1’s financing structure is also extensive.

VAT and working capital are challenges, as the impact on cash flows is important for the operations of the franchise and for shareholders.

HS1 needs to allocate responsibility internally to deal with operations, the regulatory complexities, and financing.  Similarly, HS1 needs to allocate responsibility to deal with the new external relationships with the regulator, the lenders, the shareholders and investors.

HS1 is not able to formulate a long-term strategic plan because the overall picture is unclear.

Furthermore, the segmented nature of the revenues requires evaluation, as does the conflict between month-to-month operations and the long-term strategic view.

The solution

Lazuli specifies and builds two models: a strategic operating model, and a short-term operating model, both built in Excel.

These models have an interface, allowing the short-term model, used for the monthly operations, to feed into the long-term strategic operating model.

The results

The model brings together the operational complexities, the financing requirements, the basis for the negotiations with the regulator and the strategic plan, all within a common agreed language and franchise valuation.

The new models create a common vocabulary for efficient discourse both internally and externally with investors, shareholders, lenders and the regulator.

The plan agreed with the UK rail regulator is described within the model, as is the finance and revenue segments.  VAT and working capital arrangements are aided by the introduction of a cash flow waterfall to add a priority of payments at the heart of the two models.

The model build process gives HS1 the opportunity to start allocating responsibility internally.  This process is by no means instant, but rather an evolution that will enable HS1 to invest in people for better long-term relationships with investors, shareholders, lenders and the regulator.

The model also allows HS1 to formulate a strategic vision for the franchise, through use of the long term forecast in the model and in conjunction with the external stakeholders.  The agreed franchise valuation is the ultimate gauge of the efficiency of the strategic vision.

Lazuli designed and delivered financial models that allow HS1 the time and clarity to operate the franchise, optimise the refinancing, and report to stakeholders.