ppp finance

May 22, 2008 Presentation title

Darrin GrimseyPartner Infrastructure AdvisoryGlobal Perspective on PPPs

RMIT, Advanced Construction Management24 March 2011

Introductions: Darrin Grimsey, partner PFA based in Melbourne etc

Introduce the presentation:

1.Brief History

2.Impacts of the GFC

3.What does it mean going forward


© 2009 Ernst & Young Australia. Liability limited by a scheme approved under Professional Standards Legislation.1

Banking video

Washington Mutual was the United States' largest savings and loan association until itscollapse in 2008.

It prided itself on its record in customer service.

On September 25, 2008, the United States Office of Thrift Supervision (OTS) seizedWashington Mutual Bank from Washington Mutual, Inc. and placed it into the receivership of theFederal Deposit Insurance Corporation (FDIC).

The OTS took the action due to the withdrawal of $16.4 billion in deposits, during a 10-day bankrun (amounting to 9% of the deposits it had held on June 30, 2008).

Washington Mutual Bank's closure and receivership is the largest bank failure in Americanfinancial history.

Before the receivership action, it was the sixth-largest bank in the United States and held assetsvalued at $327.9 billion.



A Brief History…early roads

▶ Toll roads are no new thing

▶ The Greek historian and philosopher Strago (63 BC – AD 21), writing in Geographia at thetime of Caesar Augustas records there being tolls on the Little Bernard’s Pass

▶ Middle Ages, tolls were used to support the cost of bridge construction

▶ In 1286 London Bridge had tolls

▶ Turnpikes were the precursors to the modern build, operate, transfer system

▶ The name comes from the hinged barrier that was stretched across the road and preventedpassage

▶ The first turnpikes in the UK were establishes in 1663

▶ From the first in 1663, and with a great expansion in the 1750s-70s, there were thousands oftrusts and companies established by Acts of Parliament with rights to collect tolls in returnfor providing and maintaining roads; turnpike trusts.

▶ A General Turnpike Act 1773 was passed to speed up the process of setting up sucharrangements.

▶ Just how trustworthy and effective was the provision and maintenance can be imagined.▶ Opposition was strong and turn;pikes were seen as a transfer from the poor, who had been

able to travel for free, to the rich, who had the most to gain travelling long distances

▶ The first US turnpike to be constructed and operated by a private corporation was thePhilidelphia-Lancaster turnpike, chartered in Pennsylvania in 1792 and completed 2 yearslater

▶ It was envisaged that ownership would revert to the states typically at the end of a 99 yearlease

▶ Few made it this far and were abandoned or decommissioned

▶ Earely 1900s remaining toll roads were acquired by state and local governments to establishthe state highway system

▶ Much the same in the UK with none paying off debt in their 21 year term



A Brief History…railway mania

▶ Railways had a serious impact on long distance road traffic from the 1830s, and manyturnpike trusts were discontinued.

▶ Many think of the railway mania of the mid nineteenth century as the grand era of privatesector involvement in infrastructure investment

▶ Engineers of the day like Isambard Kingdom Brunel were in fact entrepreneurs and projectfinanciers

▶ Story of the Great Western – lobbying government – raising finance – using the telegraph asadditional commercial revenue stream

▶ Still went broke!

▶ The London Underground – between 1894 and 1907 companies engaged in building thenew “electric tube”

▶ Some had great difficulty raising the capital and eventually it consolidated ownership intotwo companies

▶ Technological and regulatory changes led to financial difficulties

▶ By the time the underground system was finally in place in 1907, buses were more reliableand the advantages of running on public roads, operated at considerable profits while theunderground lines were struggling to pay

▶ Trams also provided another source of competition

▶ In 1933 the companies were effectively nationalised



A Brief History…French Concession

▶ The French PPP model goes back more than a hundred years

▶ Known as Concessions▶ In 1995 75% of the population was provided with water under PPP contracts.

▶ Two operators, Lyonais des Eaux and Vivendi (now Veloia Environmental) controlled 62% ofwater distribution, 36% of sewage disposal, 75% or urban central heating, 60% of refusetreatment, 55% of cable operation, and 36% of refuse collection.

▶ Elsewhere this would be remarkable, but not in France

▶ Most of the railway network, water provision facilities and street lighting were developed asPPPs

▶ The first concession for the construction and financing of the Canal du Midi in 1666

▶ Since then entrepreneurs were effectively given a franchise to provide public services forspecified periods

▶ In 1782 the Perrier brothers were granted the first water concession to provide waterdistribution system to parts of Paris

▶ Another famous example is the concession for the 160km long Suez Canal completed in1869 under a 99 year concession

▶ Apart from the war periods concessions have been and continue to be a featuer of publicservice delivery in France

▶ Veolia, Suez Lyonnaise, Bouygues, Vinci, SAUR, Sodexho and Connex are householdnames not just in France and all grew on the back of the concession model

▶ High speed rail, toll roads, followed and at the local level almost all public services are opento concession arrangements



A Brief History…Recent Developments

▶ Privatisation in the 1980s

▶ Private Finance Initiative in the 1990s▶ DBFO roads first

▶ Then PFI prisons – full operating model

▶ Waste Water in Scotland and Northern Ireland – full operating model

▶ Finally PFI in hospitals and schools – serviced infrastructure model

▶ Similar story here

▶ Power privatisation

▶ Toll roads – economic infrastructure

▶ Private health

▶ We already have private schools of course

▶ Hospitals, schools, court houses, TAFE, prisons etc

▶ The pictures – a sort of cv....



Project Finance

▶ What underpins the model today

▶ Firstly PPPs are not the same as privatisation▶ Firstly under PPPs the public sector effectively acquires and pays for services by contrast a

privatised body takes over the business and also takes responsibility for service delivery

▶ The private firm is subject to disciplines from both product and capital markets in the form ofcompetition form other firms and competition when raising finance

▶ Even if these disciplines do not exist in the market the government will impose regulatorydisciplines to manufacture them

▶ A PPP is a formal contract

▶ Regulation through contract and the lack of government disengagement define much that isdistinctive about a PPP

▶ Essentially PPPs are about sharing the risks of public service delivery that require significantinvestment in infrastructure

▶ Project finance is the glue that holds the risk allocation together

▶ A feature of PPP is the commitment of private sector finance to the construction orrenovation of facilities.

▶ Private risk capital leads to a harder-nosed approach to project evaluation, risk managementand project implementation.

▶ The aim of project finance is to achieve a financial structure with minimum recourse to thesponsors, while at the same time providing sufficient support so that financiers are satisfiedwith the risks.

▶ Financing of PPP projects must be engineered to take account of the risks involved. It mustthen be designed and implemented under strict management to ensure that the risks aremanaged and the capital investment in protected

▶ The combination of upfront engineering and downstream management of project executionplays a defining role in bringing about the required outcomes and delivering value for money

May 22, 2008 Presentation title 8


Operation/FM“Soft”

Direct agreement

Senior Lenders

Purchaser

Operating Company

(SPV)

Design/spec

FM Cleaning OtherServicesInstaller

Construction & Lifecycle

“Hard”

EquipmentProvider

Building Contractor

Equity Funding

Public sector

Private sector

Project agreements

Project Finance

Without the market disciplines highly geared project finance might simply be dismissedas just another exotic financing game

The PPP process is about assessing risks and putting in place appropriate contractualstructures to deal with them

In effect having the privately provided finance at risk acts as a catalyst to inject riskmanagement techniques into the project in a way that is simply not possible undergovernment financing

The contractual structure that flows out of the project finance model is just as importantas the private finance itself

•Explain diagram

•Traditional approach

•Financier led approach


© 2009 Ernst & Young Australia. Liability limited by a scheme approved under Professional Standards Legislation.

What does financing mean for PPP projects

8

$

Capital Costs

And Fees

Loan Repayments

Interest

Interest

Yrs 1-4 Yrs 4-30

Other Costs – FM, life-cycle etc.

PPP ServiceFee

Simple representation of how the PPP cashflows work



What does financing mean for PPP projects – Simpleillustration of impact of the GFC

9

$

Capital Costs

And Fees

Loan Repayments

Interest

Interest

Yrs 1-4 Yrs 4-30

Other Costs – FM, life-cycle etc.

PPP ServiceFee

Then along came something called the Global Financial Crisis

The global financial crisis, brewing for a while, really started to show its effects in the middle of2007 and into 2008. Around the world stock markets have fallen, large financial institutions havecollapsed or been bought out, and governments in even the wealthiest nations have had to comeup with rescue packages to bail out their financial systems.

A collapse of the US sub-prime mortgage market and the reversal of the housing boom in otherindustrialized economies have had a ripple effect around the world. Furthermore, otherweaknesses in the global financial system have surfaced. Some financial products andinstruments have become so complex and twisted, that as things start to unravel, trust in thewhole system started to fail.

The subprime crisis came about in large part because of financial instruments such assecuritization where banks would pool their various loans into sellable assets, thus off-loadingrisky loans onto others.

Rating agencies were paid to rate these products (risking a conflict of interest) and invariably gotgood ratings, encouraging people to take them up.

High street banks got into a form of investment banking, buying, selling and trading risk.Investment banks, not content with buying, selling and trading risk, got into home loans,mortgages, etc without the right controls and management.

Many banks were taking on huge risks increasing their exposure to problems. Perhaps it wasironic that a financial instrument to reduce risk and help lend more—securities—would backfire somuch.

PPPs didn’t cause the GFC. Most PPPs are highly insulated from the affects of the GFC.Nevertheless PPPs or more specifically project finance has been caught up in the aftermath ofthe GFC



The Impact of the GFC

Prior to GFC During GFCCertainty and Availability ofFinance

Finance available in largevolumes

Financial volumes for bothdebt and equity restricted

Sources of Finance Overseas and local Greater reliance on local banks

Type of Funding Mixed funding type eg, bondsand bank debt

Debt only – club arrangements

Cost of Finance As low as 75bps Up to 400 bps

Terms and Conditions Long term Short term

GovernmentContribution/Support

Usually not required Required for certain projects

10

When people did eventually start to see problems, confidence fell quickly. Lending slowed, insome cases ceased for a while and even now, there is a crisis of confidence. Some investmentbanks were sitting on the riskiest loans that other investors did not want. Assets were plummetingin value so lenders wanted to take their money back. But some investment banks had little indeposits; no secure retail funding, so some collapsed quickly and dramatically.

The problem was so large, banks even with large capital reserves ran out, so they had to turn togovernments for bail out. New capital was injected into banks to, in effect, allow them to losemore money without going bust. That still wasn’t enough and confidence was not restored. (Somethink it may take years for confidence to return.)

Shrinking banks suck money out of the economy as they try to build their capital and are nervousabout loaning. Meanwhile businesses and individuals that rely on credit find it harder to get. Aspiral of problems result.



Impact on recent PPP projects

11

Costs

Notes:NPC at December 2008NPC at current market conditions – optimistic (300bp margin during Construction and 150 bp duringOperations)NPC at current market conditions – mid case (300bp margin during Construction and 200 bp duringOperations)NPC at current market conditions – pessimistic (300bp margin during Construction and Operations)

Risk Transfer –Victoria Desalination

PlantSyndication guaranteeRefinancing protection

Material adverse change clause

Reduced CompetitionArarat Prison

New Royal Adelaide Hospital



GFC and the impacts on financing

▶ Pricing has increased dramatically; similar trend across the regions

▶ Higher cost of capital a key issue for the value for money equation; requires more attentionto technical aspects of bid evaluation

▶ This approach has implications for all aspects of the financing for a PPP project. That is:

▶ tighter debt terms surrounding a range of parameters includinggearing, margins, fees, covenants, cover ratios, debt tenors,security, reserve accounts and performance bonding

▶ bid validity periods on recent transaction have been in the order of30 to 45 days

▶ A requirement for lower leverage (or higher equity contributions) is also evident. Theaverage debt:equity ratios of project finance transactions over the past four years suggest adramatic shift towards equity during 2008 as the GFC reverberated. Gearing ratios movedfrom an average of 84:16 to 73:27 (based on data complied by Infrastructure Journal). InAsia and the subcontinent, the comparative data suggests that gearing ratios, which typicallyare lower than those observed in Europe, are still low, with average ratios of 69:31 in 2007and 72:28 in 2008 (also based on data compiled by Infrastructure Journal).

▶ As could be expected from even a quick snapshot of the extent of market dislocationoutlined above, the pricing of finance has increased dramatically. The impact has been onboth equity and debt finance.

▶ Equity investors are seeking higher risk premiums. Note that falling underlying interest rateshave meant that the observed level of real returns appears to have remained stable; ineffect, the pricing of risk has increased substantially.

▶ Debt pricing is arguably a greater concern to both sponsors and to the public sector. Therehas been a significant step up in debt pricing as the GFC progressed. The graphic refers todata from the United Kingdom but it illustrates a trend that has been mirrored in Asia Pacific.

▶ For example, in Australia recent projects have seen margins of up to 300 basis points.



Australian risk pricing continues to challenge corporates andPPPprojects

▶ GFC resulted in increase in relative cost of finance for riskier projects andcompanies (BBB vs AAA debt)

▶ In Australia, this effect has been sustained. In contrast, in some overseasjurisdictions, GFC spike has eased

Source: Bloomberg

What is interesting is that here in Australia credit spreads have remained higher than elsewhere.

Explain...



Components of the cost of finance

▶ Initial term debt margin costs account for relativelysmall portion of overall NPC for PPPs

▶ Equity and refinancing costs drive most of the NPC.This is particularly the case given low gearing andhigh DSCR requirements (being driven by debtfinanciers)

Note: Reflects interest and fee costs (NPC).Source: EY indicative modelling. Actual results will vary depending on financing structure and pricing.

Explain what is eroding value for money for PPPs

Essentially a different view on risk

Is the market right?

Is Government right?

Is the theory right?



What is the data telling us? (source Infrastructure Journal)

Starting with a look at debt by sectors, nearly all those covered by IJ recorded an uptick by debtvolume compared to 2009 with the notable exception of water and wastewater sector which sawa substantial decline and telecoms which remained at a near similar level.

The Oil & Gas sector (with a debt value of US$47.4 billion), followed by power (US$31 billion),renewables (US$29.3 billion) and transport (US$28.2 billion) were the leading four sectors in thatorder.

The improvement by debt volume on an annualised basis was more pronounced in Oil & Gas andmining sectors which recorded 61 per cent and 398 per cent growth respectively, with latterreturning to 2008 levels albeit from a dismal 2009; something which is very visible in the statedthree-figure uptick percentage.

Comparing the entire dataset since IJ began the current series - only the Oil & Gas andrenewables sector PF debt volumes have capped their respective sector performance levelsrecorded prior to the financial crisis in 2007. Total cross sector project finance (PF) debt for 2010came in at US$170.6 billion up from US$121.5 billion in 2009 but some way off the pre-crisis levelof US$253.3 billion.




Moving away from debt volumes and switching focus to the number of PF deals involving debttransactions, the renewables sector (with 264 deals), social infrastructure (103 deals), transport(71 deals) and power (67 deals) were the leading sectors.

The number of transactions rose across all sectors except water and wastewater.

Overall, IJ recorded 614 transactions in 2010 up from 499 transactions in 2009; but again thetotal is some way off the total figure of 735 transactions recorded in 2007.

A glance at IJ's figures, using either of the datasets by volume or the number of transactions,suggests that many sectors saw good access to capital markets and continuing improvements inavailability and terms of bank debt facilities - the renewable and power sectors for instance.However, it is puzzling why the water and wastewater sector has taken a beating.

There appears to be no paucity of demand; quite the contrary the need for wastewaterinfrastructure and potable water projects has never been greater. The decline in project debtvolume for the water and wastewater sector has nothing to do with bank market demand,according to market commentators.

One theory is that with a big ticket deal in Australia having reached financial close and the MurrayDarling basin water rights issue being dealt with, the figures for 2009 were inflated. Truth of thematter is that this sector was not a particularly active one before the crisis and the trend continueseven during the current market recovery phase.

The one sector which appears to have no such pressing concerns is the renewables sector wheredebt finance has never been healthier and it saw the highest number of PF debt transactionsclose.

Switching to a regional focus, Western Europe remains the leading market with PF debt risingfrom US$33.32 billion in 2009 to US$54.72 billion last year; the highest for all regions covered byIJ. as Malaysia, Thailand and the Philippines, a blend of international and local banks aresupporting projects, along with corporate bond markets," he concludes.




North America (with US$32.29 billion) and Asia Pacific (US$35.6 billion) also recorded impressiveannualised growth rates of 63.4 per cent and 178 per cent from relatively low positions, especiallyin case of the latter. The uptick in activity in the Asia Pacific region is largely driven by activity inAustralia whose market is in turn dominated by mining and oil & gas projects.

Senior debt pricing is generally higher than Europe with 230-250 bps common across recentlyclosed PPP deals, predominantly driven by high funding costs as Australian banks source nearly35 per cent of funding offshore. However with some European banks keeping a presence in theAustralian market directly or via Asia, margins have begun to contract.

Asian banks have also been providing medium-term debt to export-related Australianinfrastructure projects, typically backed by off-take agreements from sponsors domiciled in theirhome markets, Byrne notes further.

Elsewhere, PF debt levels for last year were near similar to 2009 in Africa & Middle East andEastern Europe. However, Latin America and the Indian subcontinent posted a decline from2009. Part of the decline may be attributed to the fact that both Brazil and India - the largesteconomies in both regions - continue to remain very insular for foreign financiers and regional PFis heavily skewed towards domestic players.

In case of the latter, foreign banks also struggle with the level of corruption, red tape and thepainfully long time required to get deals done and putting financing structures in place.

China, India, Korea and Japan the local banks can lend large volumes over longer tenors andliquidity is not seen as an issue.

Local banks in these markets currently represent around 75 per cent of the Asian project financedebt markets. In countries without deep local bank markets, like Indonesia, Vietnam, and Laos,we are still seeing the presence of international banks in transactions as providers of long-termcapital. Similarly, in countries with solid local banking markets such as Malaysia, Thailand andthe Philippines, a blend of international and local banks are supporting projects, along withcorporate bond markets,




A break-up of figures by sources of funding predictably suggests that loans, government andmultilateral support followed by bonds accounted for most the PF debt market in that order.However, it is the rise in valuation across all three sources of funding which tells different tales.

Beginning with loans, 2010 saw US$155.99 billion worth of commercial lending for infrastructureprojects, up from US$111.82 billion recorded over 2009. In itself, this represents a bounce backof sorts, but commercial lending for projects still has some distance to travel before it caps the2007 figure of US$228.23 billion; hitherto the highest on record in IJ's dataset.

Multilateral agency and government support has been rising steadily since the global financialcrisis, as governments and agencies stepped up to take some of the infrastructure finance spacevacated by private financiers. This trend is clearly visible in the figures for multilateral andgovernment loans either side of the crisis.

For instance, in 2007 the figure stood at US$7.5 billion but by the end of 2010 this had risen toUS$31.63 billion. In the interim, 2008 and 2009 witnessed multilateral and government loans tothe tune of US$22.41 billion and US$21.68 billion respectively. The fact that multilateral agenciesare not in retreat even as the debt market returns to health can only be a good sign.

Another encouraging sign is the recovery in the bond markets. In all fairness, bond markets andrefinancing go hand in glove for some commentators. In 2007, bond finance volume came in atUS$24.93 billion, but as the crisis took hold and monoline insurers took a beating, by the end of2008 the annual volume fell to a mere US$3.56 billion. After limping along 2009 with a volume ofUS$8.32 billion, a renewed sign of life of was seen in 2010 with an uptick in bond finance volumeto US$13.46 billion.

IThe demise of the monoline model created an associated closure of the long term bond marketsfor infrastructure projects. Investors such as insurers and pension funds, etc are looking for longterm, stable assets to match their long term liabilities. Hence, there is a noticeable uptick in bondmarket activity, as we see from IJ's figures, albeit that uptick is from a low point 2009



Financial market influences

▶ Current trends

▶ Foreign banks re-entering the PPP market

▶ Bank lending has improved – $100M to $200M each

▶ Validity periods have improved – 90 days

▶ Underwriting market and bond market remain closed

▶ Margins remain at 200bp-300bp (up-from 80bp to 100bp)

▶ Short-term debt remains at under 10years (from 30years)

▶ Impact on infrastructure

▶ More banks needed by bidders

▶ Ensuring a competition process for larger projects ($1.5B+)

▶ Sharing of future refinance gains an important issue

19



WhatdoesthismeanforPPPprojects

▶ More expensive

▶ Less certain

▶ Less risk transferred

▶ Less competition as a result of bankinfluence

20

VFMConsiderations



Headlines

The Australian, 16th May 2009The Australian, 8th December 2008

Australian Financial Review, 16th February 2009

Sydney Morning Herald 17th September 2009

The Australian, 27th August 2009The Australian, 18th May 2009

The Australian, 12th June 2009

Infrastructure assets are low risk and can give good returns over long periods.

The GFC has not changed the performance risk profile of infrastructure assets procured throughPPP, but it has exposed the frailty of some of the highly-engineered transaction structures usedto fund those assets.

That is, the listed funds model, which in Australia has most commonly been used to structureinvestment in ‘economic’ infrastructure for which the private sector bears demand risk, notably tollroads and airports, and utilities and communications assets.

The listed funds model relied on attracting and refinancing large volumes of shorter-term debt inan attempt to deliver as much yield as possible.

The sudden change in the availability and cost of debt for infrastructure assets inherent in theGFC has exposed several aspects of the listed funds model, notably the mismatch between shortterm debt cycles and long duration assets, and opaque asset management arrangements without‘arms length’ pricing principles.

In this sector, it is perhaps time to get back to basics and look for a simpler model that recognisesthe underlying quality of the infrastructure asset and matches investors’ requirements.

As Australia’s aging population reduces the taxation pool, governments will need to find newsources of funds for long-term infrastructure projects. Unlisted funds, dominated bysuperannuation institutions, appear to be the way forward for infrastructure. While such projectsappear to be an excellent fit with the investment appetite of Australia’s trillion dollarsuperannuation industry, a new Ernst & Young survey reveals superannuation funds are unlikelyto increase infrastructure investment while projects are offered in their current form.



Is superannuation a silver bullet?

EY Survey revealed barriers to investment forthe delivery of new infrastructure ...

▶Where is the value?

▶Problems with liquidity

▶Poor alignment with investment strategies

▶Greenfield projects (particularly withrevenue risk) are less attractive

▶Complex, expensive bidding process

▶Lack of a clear project pipeline

▶Lack of specialist expertise

The reality is of course somewhat more complex than the headlines would suggest. Notunsurprisingly superannuation funds have the best interests of their customers inmind when they make an investment. Nation building and the needs of governmentor for that matter the country are not factors. Nor should they be.

The first myth is that there is a a trillion dollar available. Fact is that one third of the superin Australia is in self managed funds. These funds are not available for directinvestment into infrastructure.

We’re also only talking about the new money coming in every month. The rest is alreadyinvested. Even the funds held in cash aren’t available as cash serves an importantfunction to a fund.

Retail is another big component and whilst it might include some infrastructure it’s not agreat deal.

We’re not actually left with much of the trillion dollars that is actually available forinfrastructure.

Ernst & Young’s survey reveals a number of hurdles to the industry investing ininfrastructure assets. Some, such as the likelihood for asset valuations to fall furtherand the peculiarities of individual investment strategies, are beyond the influence ofgovernment. Others, such as lack of transparency, uncertainty and processcomplexities point to strategies that would enable governments to attract moresuperannuation investment to infrastructure projects. The slow and lumpy deal flowin Australia is also cited as a barrier to greater participation. The lack of consistentdeal flow undermines the case for superannuation funds investing in the skills toengage earlier in procurement processes for PPP projects and to take on risks as abidder. Governments are in a position to influence deal flow to an extent but wouldultimately be constrained by the relatively small size of the market in Australia.Finally, the industry itself has an opportunity to improve expertise in this specialistarea.



Boosting superannuation investment in infrastructure

§ Infrastructure bonds

§ Better transparency

§ Certainty of regulation in new markets

“Infrastructure bonds would be more attractive risk/ return wise. Although it may be difficult toconvince superannuation funds of their merits. It weathers premiums and inflation”

Superannuation Investment Officer

In encouraging news for governments seeking infrastructure investment from the superannuationindustry, while many funds were at or even over their strategic asset allocation to infrastructure,many say they will still consider new opportunities on a case-by-case basis. In this regard, theyare looking for reliable, long-term returns. Governments have opportunities to attractsuperannuation as a long term infrastructure player by looking at other credit instruments,reducing risk, increasing transparency, standardising processes and clarifying regulation. Unlessthey do so, superannuation will continue to channel much of its infrastructure investmentoverseas, putting our national savings to work for other countries.

If it can achieve this shift in its own superannuation industry then Australia has a real opportunityto once again be the market leader in the region. Australia could become a centre of excellence.Most recently, this potential has been recognised by the Victorian Government in its GrowingVictoria’s Financial Services Sector (August 2009). The statement proposes measures which aimto establish Melbourne as a global centre of excellence in pension and funds management.



Looking beyond the GFC

▶ Permanence of changes

▶ Bond Markets

▶ Cost of Capital

▶ Competition

▶ Policy Interventions

▶ Equity Investors

▶ Operating Focus

▶ PPP Exports

▶ GFC has not undermined the PPP model; the opposite is true – it has been robust andnimble to absorb the challenges to value for money of illiquidity and the repricing of risk andflexible - to adapt to innovative financing structures to address changes in investor appetites

▶ Interesting debate about the extent to which changes will prove to be permanent:▶ market disruption clauses: a risk the private sector can manage

with stable and liquid wholesale funding markets▶ Key consideration is the speed of recovery in capital markets, which are a typical source of

bank funding. Return of capital or bond markets – positive signs including corporate sectoractivity and two PPPs in Canada. Further recovery may also require the re-entry of creditenhancement providers.

▶ Will the cost of capital recede - arguably the pendulum of risk pricing has swung too far. Akey consideration for improved pricing will be further stability in wholesale funding marketsand higher levels of competition among lenders to projects. Greater competition likely to bea driver for reducing (or in the case of smaller transactions, eliminating) the need for directgovernment support such as guarantees

▶ Key focus is attracting new classes of long term equity investors. Superannuation orpension funds have the funds but challenge is removing barriers to participation. Barriersidentified are the lack of transparency of returns and pricing of assets, lack of a clear andconsistent pipeline of projects, and concern about the extent of risk transfer.

▶ Turn the focus to the operating phase as more projects reach maturity. Assess delivery ofvalue against expectations, and draw out lessons. Emerging issues include the role offacilities managers and the design of payment mechanisms These issues cross sectors andjurisdictions so building knowledge offers wide benefit

▶ Encourage participation of contractors, sponsors and lenders outside their home markets

▶ Wrap Up: GFC has had significant impact. PPP survived and adapted to changedenvironment. Role of private sector changing. Extent to which risk changes permanentoand pricing. Will we see new models emerging that facilitate access of new investors?

▶ Interesting times ahead.



Banking video

ppp finance

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