Kevin Smith: When it comes to opportunities for sustainable finance in the rail sector, what support is out there? And how might different organisations obtain it?
Sebastian Blum: We see various kinds of support on different levels. Worldwide there is a substantial move to contribute to net zero through the development of net zero emission transport systems. In the European Union (EU), companies have intensified their contribution to achieving the EU’s Green Deal by pursuing modal shift and encouraging greater use of rail as well as embracing new transitional technologies such as hydrogen-powered rolling stock.
We are seeing a growing number of businesses across the rail industry focusing on increased environmental sustainability, which is also opening new doors to raising finance. Furthermore, we note that many investors are attempting to ensure that their entire value chain, including financing, is green, which offers additional opportunities in this field.
Within our bank, we have strengthened our capacities to offer green loans or sustainability-linked loans, including related advisory services. In-house green loan experts support our internal sectoral expert divisions and provide additional advisory services to clients. This supports the implementation of green finance frameworks, including second party opinions. The support offered by the Sustainable Finance Advisory to encourage more green, sustainable frameworks and sustainable lending is helping to align our clients’ sustainable strategies with the sustainable financing facilities that are now available.
Furthermore, rating agencies are helping to identify the material challenges for clients as they grapple with ESG Ratings. This could be the focus of Sustainability Linked Loans, which are connected to sustainable KPIs. These work in accordance with ambitious Sustainable Performance Targets (SPTs) to offer set pathways to a more sustainable future with a positive societal impact and economic outcome.
I should also mention that there is another form of support available for export finance of green projects, which include electrified railway infrastructure and electric rolling stock. Due to the modernisation of the OECD consensus, these kinds of projects are benefiting from better conditions, including longer tenures of up to 22 years, plus delivery and construction periods. This type of support is not limited to projects in the developing world, but is also available for projects in developed countries.
KS: What challenges does securing railway finance entail? What specific bureaucratic/legislative hoops does the sector have to jump through? How might you help the sector to overcome these?
SB: Cross-border railway network harmonisation remains limited in Europe. Rolling stock still has to meet the technical requirements of each individual network, which makes it more expensive and redeployment more difficult. In addition, every jurisdiction has its own requirements. For example, in Germany every public transport authority has a different model for organising, operating and financing public transport operating contracts, adding to the complication.
Consequently, respective collateral structures are needed for cross-border transport. Wider recognition and adoption of the Luxembourg Protocol would support the harmonisation of the perfection of securities, reducing costs and supporting the financing of international rolling stock projects. Thanks to the efforts of the Rail Working Group, of which we are a member, there is progress with the Protocol, which came into force earlier this year initially in Gabon, Luxembourg, Spain and Sweden along with the EU, in respect of competences. Further adoption is encouraged.
KS: Where do you see the biggest opportunities and in what types of projects? Previous articles have talked about the H2 trains for Heidekrautbahn. Are there other examples worth highlighting? Also, you’re a European bank, but have talked about working on projects further afield, such as Africa. Can you explain the work you are doing here?
SB: The biggest opportunities are in transformational projects that encourage a reduction of CO2 emissions as well as help to develop society and offer improved economic value. For example, transitioning away from diesel to electric traction, including the adoption of hydrogen and battery fleets on regional lines, extensions of high-speed lines, and improving rail infrastructure in developing countries, are all areas we are targeting.
As a German transformational bank, we support various markets, not only in Germany, but also in other European countries and worldwide.
As you have already mentioned, one example in Germany is the transformational Heidekrautbahn project. Seven hydrogen trains will enter service in December 2024. Another example is Cologne S-Bahn, where we are supporting the modernisation of local rail passenger transport in the Rhineland with an investment of around €400m. Cooperation and deals with locomotive leasing companies like Railpool and Alpha Trains are other important projects to highlight.
With respect to the African market, we are promoting the construction of the new Standard Gauge Railway network (SGR) in Tanzania. The main aim of the SGR is to alleviate road traffic congestion, carry freight and passengers safely and faster, reduce CO2 emissions and to increase social and economic value in the country. Elsewhere in Africa, we endorse the development of the high-speed network in Egypt.
In addition, modernisation of existing transport infrastructure is an important part of the green transformation. Norwegian infrastructure manager Bane NOR is an excellent example for increasing investment in this regard. Through a green loan valued at approximately €100m, we’re helping to finance green projects to improve railway infrastructure, maintenance depots and train stabling facilities across the country.
Outside of rail, another example of our global presence is support for procurement of electric buses. We are financing the decarbonisation of transport in Australia and New Zealand by Kelsian and Kinetic, investors in electric buses and respective EV-charging infrastructure.
