Project Finance – which way to go?

View of the decision-maker

Berlin, 14th September 2011

Jarosław Waszkiewicz

Ministry of Infrastructure, Republic of Poland

European background

Lessons learnt from the past

The project

Current practice and market opportunities

Financial crisis and public deficit and debt

The dilemma

Overview

Financial and economic crisis - goals

• stabilise financial sector

• limit the impacts of the recession

• maintain economic activity

Recovery programmes

• invest in infrastructure projects

• develop effective ways of delivering projects

• innovate and modernise

• explore additional sources of capital

Leverages

• provide safeguards for investors

• stabilize cash flows

Background

Sources of financing of Infrastructure investments

in the EU by sectors

2006-2009 EU Average, in GDP %

2006-2009 EU Average, participation in

total

Education Education Health Health

Public services Transport Public services Transport

Private Financing

other than PPP

PPP Corporation Government

Źródło: Eurostat, Projectware, EIB/EPEC

Sources of financing of transport investments in

the EU in some old and new EU Member States in

the period 2006-2009

Old EU Member States New EU Member States

Private financing

other than PPP PPP Corporation Government

Źródło: Eurostat, Projectware, EIB/EPEC

PPP in 2010 in the EU

value of PPP transactions in the EU, which achieved financial closure amounted to 18,3 bln euro

(about 75,8 bln PLN*)

number of projects: 112

Following countries were PPP leaders:

by number of contracts: Great Britain (44), France (19), Germany (14), Spain (13);

by value: Spain, Great Britain, Portugal (all above 3 bln euro)

value of transport projects amounted to nearly 50% of the value of all PPP projects

Źródło: Market Update - Review of the European PPP Market in 2010, EPEC

* According to avaerage rate of NBP (01.09.2011)

Źródło: EIB, „Public –Private Partnerships in Europe – before and during the recent financial crisis”, Andreas Kappeler, Mathieu Nemoz, Lipiec 2010

Number of PPP projects realised in the EU

in following sectors

Average 2001- 2006 2007 2008 2009

Universal

public

services

Defense

Public order

and security

Transport Environment

Health Recreation,

culture,

religion

Eduction

Source: Data comparison from : EIB, „Public–Private Partnerships in Europe – before and during the recent financial crisis”, Andreas Kappeler, Mathieu Nemoz, July 2010;

EPEC, Market Update Review of the European PPP Market in 2010

The PPP projects implemented in the EU in the

period 1990-2010

0

20

40

60

80

100

120

140

160

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

Liczba projektów, które uzyskały zamknięcie finansowe

number of

projects with financial closure

Source: Data comparison from: EIB, „Public–Private Partnerships in Europe – before and during the recent financial crisis”, Andreas Kappeler, Mathieu Nemoz, July 2010;

EPEC, Market Update Review of the European PPP Market in 2010

Value of the PPP projects implemented in the UE

in the period 1990-2010

0

5000

10000

15000

20000

25000

30000

35000

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

Wartość w mln euro projektów, które uzyskały zamknięcie finansowe

value of

projects with

financial

closure

M Euro

PPP system is applied on A1, A2 & A4 motorways

Negative impact of the economic crisis on PPP; example of A1 motorway

(Stryków – Pyrzowice)

Challenges: crisis on financial market and more demanding banks’ requirements

Motorways in the PPP system in Poland

(concessions):

Constructed: 299,5 km Gdańsk – Grudziądz (A1)

Nowy Tomyśl – Konin (A2)

Katowice – Kraków (A4)

Under construction: 168,3 km Grudziądz - Torun (A1)

Świecko - Nowy Tomyśl (A2)

Lessons learnt from the past

11

PPP - Current Situation (sections in operation)

A4 Katowice – Kraków

61 km Real Tolling Scheme

A2 Nowy Tomyśl – Konin

149 km Real Tolling Scheme

A1 Gdaosk – Grudziądz

90 km Availability Payment

Scheme

12

PPP - Current Situation (sections under construction)

A1 Grudziądz - Toruo

62 km Availability Payment

Scheme

A2 Świecko - Nowy Tomyśl

106 km Availability Payment Scheme

A1 Gdańsk-Grudziądz & Grudziądz-Toruń

SPV

Gdańsk Transport Company S.A. (Skanska, John Laing, Intertoll, NDI)

Contract period

2004/2008-2039

1. Gdańsk – Grudziądz (89,9 km)

in operation since 2008

Debt financing: €500 mln (EIB),

€140 mln (NIB)

Toll rate: ~0,20 PLN/km (~0,05€)

2. Grudziądz – Toruń (62,3 km)

under construction

operation start - 2011

Debt financing: €575 mln (EIB),

€150 mln (NIB),

€345 mln (Svensk ExportKredit)

Subsections

Clearing system: availability payment

A2 Świecko – Nowy Tomyśl

& Nowy Tomyśl - Konin

SPV

Autostrada Wielkopolska S.A.

& Autostrada Wielkopolska II S.A.

(Kulczyk Holding, Strabag, Meridiam Infrastructure, etc.)

Contract period

1997-2037 (AW S.A.)

2008-2037 (AW II S.A.)

A2 Nowy Tomysl junction (construction site)

A2 Świecko – Nowy Tomyśl

& Nowy Tomyśl - Konin

Subsections

1. Nowy Tomyśl – Konin

(148,7 km)

in operation since 2004

Toll rate: ~0,24 PLN/km (~0,06€)

Clearing system

Real toll (cars, LGV) / Shadow

toll (HGV) now back to real tolls

2. Świecko – Nowy Tomyśl

(105,9 km)

under construction

operation start – 2011

Clearing system

availability payment

SPV

Stalexport Autostrada Małopolska S.A. (Atlantia)

Contract period

1997-2027

Section:

Katowice – Kraków (60,9 km)

in operation since 2000

Toll rate

~0,26 PLN/km (~0,065€)

Clearing system

Real toll (cars, LGV) / Shadow toll (HGV)

now back to real tolls

A4 Katowice – Kraków

A4 Katowice-Kraków (s: www.autostrada-a4.pl)

17

18/2004 Eurostat decission issue

Construction risk

• construction costs

• permits

• design

• opening date

• quality

Availability risk

• penalties (stringent or not)

Demand risk

• availability payment & traffic fluctuation

18

PPP - Terminated Projects

A1 Stryków - Pyrzowice

180 km Contractual Payment

Scheme NO FINANCIAL

CLOSURE

A2 Stryków - Konotopa

92 km Contractual Payment

Scheme NO COMMERCIAL

CLOSURE

The crisis impact on the projects:

Rocketing cost of debt & equity risk premium

Volatility of currencies exchange rates

Update of Traffic & Revenue Study (GDP – 10%)

We could not overcome all above, but…

PPP - Terminated Projects

With regards to A1:

We decreased the capital costs

Excluding 38 km greenfield section out of the project (design&build project currently commissioned by GDDKiA)

Excluding the construction design out of the project

(currently commissioned by GDDKiA)

We are working on

swapping the contractual payment for availability payment scheme •the right to set toll tarrifs remains with the Government

•the Eurostat off-balance sheet treatment of the Project (ensuring proper risk allocation)

changing the law to simplify the tender procedure

PPP - Forthcoming Projects

21

PPP - Forthcoming Projects

A1 Tuszyn - Pyrzowice

141 km Availability Payment Scheme

A2 Warszawa – (Kukuryki)

±165 km

Remuneration systems in the PPP projects

Source: EIB, „Public –Private Partnerships in Europe – before and during the recent financial crisis”, Andreas Kappeler,

Mathieu Nemoz, July 2010

Number of the PPP projects agreements by the remuneration mechanism

used, implemented in the period 2007 – 2009 for roads, bridges and tunnels.

Real toll Shadow toll Availability fee Mixed

The Project

The A1 motorway (European Road E75) is part of the priority Trans European Network (Axis N° 25) providing a motorway connection from Gdansk (Baltic seaport) in Poland to Vienna in Austria via Katowice and Brno.

Discussed Project is related to the road section of total length of 141 km between Tuszyn and Pyrzowice and consists of two parts:

1. improvement of the existing dualcarriage way between Tuszyn and Rząsawa to international motorway standards (84km),

2. construction of a new motorway between Rząsawa and Pyrzowice (57 km).

Construction and operation of tollled motorway.

23

Overview

Overview

As stipulated in recently adopoted National Roads Construction Programme 2011-2015 the A1 Tuszyn-Pyrzowice section may be implemented as Public – Private Partnership project.

The Project is to be structured as single PPP contract on the basis of which the private partner receives the remuneration in the form of availability payment.

The private partner will be responsible for financing, construction and maintenance of the motorway, and for collecting tolls on behalf of the State.

The State Treasury will lease the land for the motorway and will provide the construction design. The motorway will be transferred back to the State at the end of the PPP contract.

25

Objective

The key objective of the Government is to achieve the Eurostat off-balance sheet treatment of the Project

26

Payment Mechanism

Traffic studies contracted not only by the Government showed average to low traffic volume which qualifies the project rather for the availability payment scheme not real tolling. Recently done General Traffic Count in 2010 shows significant increase in traffic but we have to be very careful on the subject.

The periodic payments (availability payment) will commence only after completion of the motorway and will be subject to deduction for unavailability and/or insufficient level of service. There will be no fixed payment element in the remuneration.

The Government will be entitled to additionally penalize the private partner for poor or non-performance and to terminate the contract in case of private partner’s consistent default.

27

Penalty System

If the private partner fails to meet the contractual quality requirements in any of the O&M phase periods, the availability payment will be reduced proportionally by a pre-determined formula taking into account the duration and the severity of the incident.

Lenders and the equity investors are expected to accept the operational risk of the private partner and effectively to finance the project solely based on the expectation of repayment by the private partner through the successful earning of the future payments. There will be no fixed payment element in the remuneration which would be exempt from any deductions or reductions (e.g. covering the debt repayment). Poor performance will reduce the payment stream and place expected revenues / profits at risk.

Given this, we believe that the availability payments will not be viewed as the repayment of debt owed by the public entity to the lenders (and hence as binding obligation, subject to budget appropriation). 28

Risk Transfer

As mentioned the key objective of the Government is to ensure such risk allocation, resulting from overall contractual provisions in the overall Project documentation, which will achieve the Eurostat off-balance

sheet treatment of the Project

Accounting treatment of the A1 PPP project according to ESA95 rules

RISK TYPE ON or OFF

Government Balance

Sheet

Who bears the risk ? Construction risk Demand risk Availability

Government

Government

Government ON

Private ON

Private

Government ON

Private ON

Private

Government

Government ON

Private OFF

Private

Government OFF

Private OFF

Risk Transfer

Guided by the Manual on Government Deficit and Debt, 2010 edition, we have identified certain contractual provision which shall be included or avoided in the contract in order to achieve the risk allocation, as highlighted in the table, and consequently the off-balance treatment of the project according to the ESA 95:

• Construction Risk

Construction Risk will be allocated to the private partner. The contract will provide for fixed completion deadlines and technical parameters in respect of each section. If the deadline or technical requirement is not met, there is no payment to the private partner.

There will be no provision for the partial payment (e.g. to cover the loan repayment obligation) should the project be not completed. The Private Partner will also be responsible for the cost overrun.

30

Risk Transfer

• Demand Risk

Demand Risk will be allocated to the Public Partner. Availability payment will be irrespective of the traffic level.

• Availability (Operation and Maintenance) Risk

O&M risk will be allocated to the Private Partner. Availability payment will be paid only for the completed and available motorway subject to agreed maintenance schedule and quality standards with deductions and penalties as described above (Payment Mechanism and Penalties).

• Inflation Risk

Inflation risk will be allocated to the Public Partner. The availability payment will be indexed by the CPI.

31

Risk Transfer

• Foreign Exchange Risk

Exchange risk allocation will be set during the negotiations after the financing plan principles are established. This matter will be addressed appropriately in the tender documentation to allow for required flexibility during the tender proceedings.

• Change of Law Risk

In case of change of Law the project’s parameters will be adjusted in order to put parties in the economic position, in which they would have been had such change not occurred.

32

Financing Plan Principles

Total value of the project (BOT formula): 1 bln EUR plus

• Financing structure

We expect the project to be financed in X by equity and Y by bank debt. It is envisaged that the bank debt would be sourced from EIB and commercial banks.

• State Guarantee

No State Guarantee is envisaged at this stage.

Should the State Guarantee be required by the financing institutions, the amount of the guarantee should not exceed 50% (or less if the brownfield component is treated by Eurostat as construction risk reduction) of the project costs as per Eurostat requirements for the off balance sheet projects.

33

The dilemma

Real toll concession

versus

Availability based PPP

Recent Member States experiences (Portugal) and

EUROSTAT decision 18/2004

from the 11 of February 2004 r.

Investments & Market Activities

Total road network of 385 000 km

3 TEN-T corridors (A1 motorway as EU priority axis)

Prospects regarding engineering, construction and O&M as well

Public procurement & environment law in line with EU regulations

Being among global infrastructure investment funds (John Laing, Meridiam

etc.) & European key contractors (SKANSKA, STRABAG, etc.)

Doing Business in Poland - Roads