The CityPass consortium has made a very handsome profit from the Israeli government's agreement to buy back the Jerusalem light rail Red Line for NIS 1.6 billion. The 14 kilometer Red Line began operations in 2011 but the government has been forced to buy it back from the CityPass consortium, in order to pass the project concession on to another consortium, who will build an extension to the Red Line, build the Green Line, and operate both lines.
By buying back the Red Line, the government has solved a difficult problem by paying a premium to CityPass - the price of its naivety and lack of experience in such public transport infrastructure projects.
The CityPass consortium has made a profit of NIS 1 billion on the deal - a huge sum to be divided between its members - Ashtrom Group and its subsidiary Ashtrom Properties Ltd. (TASE:ASPR) (50%), Harel Insurance Investments and Financial Services Ltd. (TASE: HARL) (20%) and the Israel Infrastructures Fund (19%) and its partner the Schoolteachers and Kindergarten Teachers Study Fund (11%).
Take for example the Schoolteachers and Kindergarten Teachers Study Fund, which bought its 11% stake in 2016 for NIS 70 million. The fund will now receive NIS 176 million and has since its acquisition received dividends of NIS 19 million. Returns of nearly 200% in less than four years by investing in an infrastructure project that was already up and running - a dream deal with little risk.
So how did the Red Line's valuation soar from NIS 636 million in 2016 when the Schoolteachers and Kindergarten Teachers Study Fund made its investment in 2016, to NIS 1.6 billion now. The sum is based on the buyback clause in the concession agreement, which capitalizes future revenue until the end of the concession in 2032. The low capitalization rate increased the value.
The Jerusalem light rail overcame many difficulties and delays and might never have begun operation without the involvement of French railway and passenger transport giant Alstom, which built the project and exited in 2016.
CityPass has not been able to comply with the level of service stipulated in the concession and this has resulted in suits and counter suits and arbitration proceedings worth NIS 1 billion between the government and CityPass. As passenger traffic has been well over the numbers forecast, the government piled on difficulties for CityPass by requesting it to increase the frequency of trains and make the awkward ticket buying and validation process easier.
Despite all these problems, the government sought to award CityPass with the NIS 4 billion Red Line extension construction contracts, extending the current line northwards from Pisgat Ze'ev to Neve Yaakov and southwards from Mount Herzl to Hadassah Ein Kerem Hospital. But the CityPass consortium argued with the government and no agreement was eventually reached.
Ultimately the impasse has helped CityPass make an impressive shorter term profit. The government decided to move ahead with another consortium - JNet, comprising Shapir Engineering and Industry (TASE: SPEN) and its Spanish partner CAF.
Published by Globes, Israel business news - en.globes.co.il - on February 17, 2020
© Copyright of Globes Publisher Itonut (1983) Ltd. 2020