private finance in the roads sector

Private finance in the road sector

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Peter Brocklebank, Associate Director, LeighFisher

25 February 2015

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Agenda

Forms of private finance involvement

PPP procurement process

Privatisations

Role of the transport planner/economist

Forms of private finance involvement

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Construction of new or upgraded highways― Public-Private Partnership (PPP) concessions

― Greenfield or Brownfield assets

Sale of existing highways or their net revenue streams― Privatisations – Permanent change of ownership

― Leasings – Fixed-period concessions

Highway maintenance― Longer-term ‘PPP’ maintenance contracts

― U.K. local authorities, World Bank Road Management Initiative (RMI)

Forms of private finance involvement

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Transaction types & stages

Secondary transactions and re-financings are under-represented in the InfraNews database

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Transaction types & country participation

InfraNews database – October 2012

PPP procurement process

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Transportation policy―Public sector objectives

―Strategies

―Funding sources and procurement methods

―Criteria for selecting, appraising and prioritizing projects

―Evaluation of unsolicited bids.

Procurement policy ―Available procurement methods

―Conditions required for PPP procurement

―PPP procurement process

PPP Procurement - General Requirements Policies

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Legislative framework―Long-term basis for PPP procurement

―Reduced procurement time and cost, and increased private sector interest

―Legal basis for enforceable contract

―Concessionaire is able to collect and retain tolls

―Regulatory controls, duties and risk allocation

―Procurement process and responsibilities defined

―Public sector concession management

Institutional framework―Specialist expertise and experience required

―Assign and recruit experts to concentrate expertise in a specialist unit

―Advisor support to assist and build capacity

―Responsibilities and approvals

PPP Procurement - General Requirements Frameworks

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Project size High transactions costs > minimum size.

Operational requirements PPP can minimize whole-life capital and operating costs. Projects with low operating costs gain less from PPP.

Payment mechanism Will traffic volumes generate sufficient revenue at toll rates acceptable to road users?

Competitive PPP market Determine private sector interest and key concerns through market testing.

Significant risk transfer How much project risk is acceptable by the private sector? If little, PPP may not be ideal.

Past experience Have similar projects been successfully delivered by PPP procurement? If so, private sector interest will be greater.

Project urgency PPP procurement is a relatively lengthy process. Traditional procurement may be preferable for urgent projects.

PPP Procurement Concession Requirements

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Unfamiliar jurisdictions

Fairness and transparency

IFI support

Sponsor quality

Political risk

Currency risk

Traffic risk

Competing sources of finance

Construction risk

Contract enforceability

Risk allocation

PPP Procurement Private Finance Issues

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PPP Procurement Bid process

Source: World Bank/PPIAF.

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A number of policy documents and websites available giving guidance on establishing and implementing PPP procurement programs; e.g. World Bank, PPIAF.

Advisor support can be requested from development partners, such as World Bank, PPIAF, AfDB and IFC.

http://documents.worldbank.org/curated/en/2014/12/23853789/private-sector-involvement-road-financing

PPP Procurement Grantor support

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Project Procurement Concession Structure

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Financial: International investment bank. Coordinates advisory team. Leads support to Sponsor in bid preparation & negotiation. Constructs & maintains the Financial Model (FM). Markets the debt.

Technical: Construction & operational design review. CAPEX & OPEX. Construction and contractual risk. International consulting engineer.

Traffic: Traffic and revenue forecasts. Traffic and contractual risk. International transport planning consultancy.

Legal: Concession agreement review and negotiation. International law practice with local partner.

Taxation: Reviews local taxation laws. International taxation specialist with local partner.

Insurance: Defines insurance requirements. International insurance specialist.

Environmental: Produces ESIA. International environmental consultancy with local partner.

PPP Procurement Sponsor advisor team

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Debt-to-Equity ratio (D/E) : Typically c. 80/20 for toll roads.

Debt margins: Rate set as margin (bps) over LIBOR, or other benchmark

rate.

Toll roads use ‘Non-recourse’ financing: Lenders are re-paid by the concession company, consortium parent

companies are not liable if the concessionaire fails.

Importance of the concession company's cost and revenue streams.

Sources of debt for toll roads: International Financial Institutions (IFI’s)

Commercial banks

Financial institutions

Export Credit Agencies (ECA’s)

Debt syndication.

PPP Procurement Financing

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Key areas: Finance: Financial Model (audited), Financing, Term Sheets.

Technical risk: Lenders Technical Advisors.

Traffic risk: Lenders Traffic Advisors produce more conservative forecasts

Legal: Concession agreement review. Termination clauses.

PPP Procurement Lenders Due Diligence

Privatizations

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Often termed ‘Leasings’.

Used to fund future infrastructure investment or reduce debt.

Typically fixed-period concessions: Between 25 and 75 years.

Concessionaire has to maintain and operate the asset and retains toll revenues in return.

Mainly a ‘simple’ financial transaction.

Traffic and revenue forecasts are critical.

Grantors may try to add ‘new build’ elements into the transaction. Generally unsuccessful due to added complexity.

Privatisations

Role of the transport planner/economist

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Traffic and revenue (T&R) forecasting

Three potential clients on a transaction:

― Grantor – Public sector promotor. Require T&R forecasts to help structure the PPP concession. Inform political decision-makers of any funding requirement.

― Sponsors – The private sector bidders. Require T&R forecasts to determine bid price.

― Lenders – Provide debt to Sponsors. Require independent T&R forecasts to assess ability of the concession company to service debts. Lenders Traffic Advisor fees paid by Sponsors.

Toll road transactions Role of the transport planners

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PPP Procurement U.K. is a leading provider of toll road advice

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Conventional forecasting methods adopted.

Focus on revenue.

Network-based traffic models; depending on timescales, budget and availability of modelling resources, especially in urban areas with dense networks.

Spreadsheet models used by Lenders advisors. May be used by Sponsors advisors; e.g. for inter-urban roads or with short bid timescales.

Traffic surveys are usually conducted by Sponsors advisors; e.g. O-D, travel time & SP surveys.

Traffic & revenue forecasting methods

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May specify concession period, or select bidder that requires the shortest concession period.

Toll regulation is critical.

Maximum permitted tolls are most common:

― Balancing economic benefits and fundability.

― Revenue-maximisation.

Toll escalation through the concession period: CPI and FX.

Concession agreement

Case study: Eurasia Tunnel, Istanbul

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Eurasia Tunnel project – Istanbul strategic highway network

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0

50,000

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350,000

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450,000

1973

1975

1977

1979

1981

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FSM

Bosporus

Cross-Bosphorus traffic growth

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Eurasia Tunnel project – Istanbul strategic highway network

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Eurasia Tunnel project – Eurasia Tunnel PPP concession

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Traffic Model structure

Forecast horizons: 2015 & 2023

Modelled time periods

• Average weekday A.M. peak hour (07.00-09.30)

• Average weekday Inter-peak hour (09.30-17.30).

Market segments

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Traffic Model coded highway network

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Competing Bosphorus crossings

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Eurasia Tunnel project – Transportation scenario

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Eurasia Tunnel - Select Link Analysis

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Eurasia Tunnel – Concession structure

Grantor :Republic of Turkey Ministry of Transport, Maritime Affairs and Communication

General Directorate of Infrastructure Investments (AYGM)

Guarantor :Republic of Turkey Undersecretariat of Treasury

Concessionaire :Avrasya Tüneli İşletme İnşaat ve Yatırım A.Ş. (ATAŞ)

Equity investors :Yapı Merkezi İnşaat ve Sanayi A.Ş. and SK Engineering & Construction Co. Ltd

:Yapı Merkezi İnşaat ve Sanayi A.Ş. and SK Engineering & Construction Co. Ltd

Joint Venture (YMSKJV)

Total Investment : $1.245 billion

Equity : $285 Million

Loan : $960 Million

Concession period :29 years

Construction Period :4 years, 7 months (55 month)

Operation Period :24 years, 5 months

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Traffic guarantee: 68,000 vehicles per day.

Concessionaire returns 30% of revenue over guarantee to Grantor.

Toll: $4.00 (+18% VAT) for cars.

Debt financing

$500m. Direct loans: EIB, EBRD, Korea EximBank.

$210m. Commercial bank loans guaranteed by Korea Export Insurance Corporations: Sumitomo Mitsui Banking Corporation, Standard Chartered Bank, Mizuho Bank.

$200m. EIB loan guaranteed by three Turkish commercial banks.

Concession agreement and financing

Traffic risk

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Understanding traffic risk:

Qualitative methods: S&P risk matrix.

Quantitative risk analysis: Simulation methods.

Grantor traffic or revenue guarantees

Typically, Grantor provides full recompense for revenue loss below guarantee. Grantor and Sponsors may share revenue above guarantee.

Grantor may retain all traffic risk.

Traffic risk assessment and mitigation

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Possible bias resulting from ‘tensions’ in between parties in the bidding process.

Forecast accuracy

Most Optimistic

Most conservative

Grantor forecasts

Sponsorforecasts

Lenderforecasts

Have T&R forecasts become part of the negotiation between Sponsor and Lenders (over debt pricing)?

Consultants’ liability for inaccurate forecasts.

Traffic risk is becoming increasing difficult to transfer to the private partner.

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