private finance in the roads sector
TRANSCRIPT
Private finance in the road sector
/
Peter Brocklebank, Associate Director, LeighFisher
25 February 2015
2 Client name or TitlePresentation title or subtitle
Agenda
Forms of private finance involvement
PPP procurement process
Privatisations
Role of the transport planner/economist
Forms of private finance involvement
4 Client name or TitlePresentation title or subtitle
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
5 Client name or TitlePresentation title or subtitle
Transaction types & stages
Secondary transactions and re-financings are under-represented in the InfraNews database
6 Client name or TitlePresentation title or subtitle
Transaction types & country participation
InfraNews database – October 2012
PPP procurement process
8 Client name or TitlePresentation title or subtitle
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
9 Client name or TitlePresentation title or subtitle
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
10 Client name or TitlePresentation title or subtitle
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
11 Client name or TitlePresentation title or subtitle
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
12 Client name or TitlePresentation title or subtitle
PPP Procurement Bid process
Source: World Bank/PPIAF.
13 Client name or TitlePresentation title or subtitle
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
14 Client name or TitlePresentation title or subtitle
Project Procurement Concession Structure
15 Client name or TitlePresentation title or subtitle
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
16 Client name or TitlePresentation title or subtitle
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
17 Client name or TitlePresentation title or subtitle
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
19 Client name or TitlePresentation title or subtitle
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
21 Client name or TitlePresentation title or subtitle
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
22 Client name or TitlePresentation title or subtitle
PPP Procurement U.K. is a leading provider of toll road advice
23 Client name or TitlePresentation title or subtitle
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
24 Client name or TitlePresentation title or subtitle
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
26 Client name or TitlePresentation title or subtitle
Eurasia Tunnel project – Istanbul strategic highway network
27 Client name or TitlePresentation title or subtitle
0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
450,000
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
FSM
Bosporus
Cross-Bosphorus traffic growth
28 Client name or TitlePresentation title or subtitle
Eurasia Tunnel project – Istanbul strategic highway network
29 Client name or TitlePresentation title or subtitle
Eurasia Tunnel project – Eurasia Tunnel PPP concession
30 Client name or TitlePresentation title or subtitle
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
31 Client name or TitlePresentation title or subtitle
Traffic Model coded highway network
32 Client name or TitlePresentation title or subtitle
Competing Bosphorus crossings
33 Client name or TitlePresentation title or subtitle
Eurasia Tunnel project – Transportation scenario
34 Client name or TitlePresentation title or subtitle
Eurasia Tunnel - Select Link Analysis
35 Client name or TitlePresentation title or subtitle
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
36 Client name or TitlePresentation title or subtitle
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
38 Client name or TitlePresentation title or subtitle
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
39 Client name or TitlePresentation title or subtitle
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.
www.leighfisher.com
LeighFisher65 Chandos PlaceLondon WC2N 4HG UK
THANK YOU