European OPP in practice: Financial Incentives

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European OPP in practice Financial Incentives
Payment Structures
Erhvervs- og Byggestyrelsen OPP Netværksmøde
Scott Smith Ernst Young
November 18, 2004
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European Healthcare Selection of Projects
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European Roads Selection of Projects
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European Light Rail Selection of Projects
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OPP Hospitals - Structures

• Hospital Facilities Management
• Build, finance and operate the building
• Some additional services
• Catering
• Waste Disposal
• Decontamination
• Equipment
• Specialist Units clinical operation /
  facilities operation
• Specialist unit assets to provide specific
  opportunities
• Hips / Eyes
• Facilities and Clinical Services
• Full hospital service provision
• Local Investment Finance Trusts (UK)

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OPP Road Projects - Structures

• Real Toll Roads
• Collects tolls
• Bridges and major crossings act as payment points
  
• Roads with strong predictable traffic flows are
  essential
• Toll roads with state subsidies
• Capital Grant
• Operating Grant
• Tariff Subsidy
• Shadow Toll Roads
• Traffic risk through state payment for usage no
  actual collection
• Combined with availability payments
• Availability Franchise Road
• No Traffic Risk
• Availability (and possibly safety) payments only

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OPP Rail Projects - Structures

• Build, Supply, Finance, Operate
• Full provision of infrastructure, rolling stock
  and operation
• Transfer of revenue risk
• State operating subsidy
• State tariff subsidy
• Construct, Supply, Finance, Operate
• State funds infrastructure investment
• Concessionaire supplies rolling stock and
  operates
• Infrastructure Build and Maintenance
• Concessionaire builds and maintains
  infrastructure
• No operation
• No revenue risk
• Availability payment

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Scandinavian OPP situation

• Practical financial situation
• OPP is an on balance sheet affair for Norway
• Norway and Denmark should have comparable
  structures
• The transactions will be classified as a
  financial leases
• Subject to Danish depository rules for community
  borrowings
• IFRS and IAS
• State / Community owns or will own the ground
• Political and safety reasons
• State / Community will recapture the asset
• Financing is not the issue, effectiveness is
• State / Community is financially solvent
• No need for borrowing, more of a case of
  allocation and timing
• Danish EU participation eases funding

The facts
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Scandinavian OPP situation

• Practical financial implementation
• OPPs for community usage are structured as a
  series of shorter term financings tied together
  with connecting interest rate commitments to
  become a long term loan.
• There is no 25-35 year bond market in Norway for
  OPP financing.
• Five year interest rate swaps are the general
  alternative
• Financing alternatives are common, subject to
  completion of construction
• Refinancing of debt
• Refinancing of equity
• Governmental claw back rights in refinancing
  are often 30 of total gain
• Financing institutions are evaluating taking OPP
  spcs on their balance sheet
• Private purchasers of Secondary interests are
  effective re-pricing instruments
• Governmental buy-ins avoid 3rd party financing
• Danish deposit rules could be addressed?

The facts
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Barking, Havering and Redbridge NHS Trust Case
Study

• Real life situations
• It is important to have some flexibility with the
  timetable e.g., the price of one of the
  bidders proposals reduced by 50 million (NPV)
  by a delay of 24 hours of the evaluation deadline
• The evaluation criteria must reflect that fact
  that the lowest cost solution is not necessarily
  the highest rated the criteria must also take
  into account the deliverability of the financing
  solution, robustness of project vehicle and any
  preferences of design among the stakeholders
• Avoid early works agreements (ie. agreements to
  commence construction prior to financial close)
  if at all possible, as it significantly weakens
  the entities negotiating position in the final
  stage of procurement

Summary of Key Issues
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Barking, Havering and Redbridge NHS Trust Case
Study

• Ensure that affordability position is reviewed
  frequently during the procurement period. The
  affordability envelope should be used as a tool
  to drive down price during the ITN period. Also,
  ensure that on selection of preferred bidder,
  there is sufficient headroom between the winning
  PFI solution and the affordability ceiling so
  that the project is not delayed for affordability
  reasons post preferred bidder.
• Negotiate a preferred bidder letter with both
  bidders, in detail. Although not a legally
  binding document, failure to comply with the
  terms is something that can embarrass the bidder
  in the market and be costly in reputation terms,
  so can be used to enforce agreements reached on
  appointment of preferred bidder.

Summary of Key Issues
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Hospital Services NHS Trust Case Study summary

• Continuous benchmarking of bids through the
  checkpoint stages.
• Significant improvement in the affordability and
  the funding packages of the bids between
  checkpoint stages and final ITN submission.
• High quality affordable bids as a result of
  rigorous checkpoint process.
• Advising the Trust simultaneously on complex and
  multiple projects located on a single site.
• Assisting the Trust in testing the affordability
  under payment by result.
• Detailed, rigorous and challenging clarification
  process resulting in over 600 clarification
  questions for each bidder

Summary of Key Issues
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European Roads- An overview

• Overview
• Significant activity in the number of road deals
  financed using project finance and public private
  partnership structures in Western Europe over the
  last five years.
• In 2003-4, project financing of over 3 billion
  was undertaken in the roads infrastructure
  sector.
• The most active countries were Austria, Ireland,
  Netherlands, Norway, Portugal, Spain and the UK.
• Spain and Portugal accounted for over 85 of the
  transactions. These countries have undertaken
  significant road programmes over the last five
  years and are now undergoing a period where a
  number of these transactions are being refinanced.

An Overview
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European Roads- An overview

• Spain
• Most active market in 2003/4, completing eight
  toll road transactions worth over 2.7 billion.
• Majority of the funding relates to the R3/R4 and
  R5 toll roads in Madrid (1.4 billion) followed
  by the Autopista de Levante (Ocana La Ronda)
  which required funding of approximately 500m.
• Nine additional road concessions are currently
  under procurement in Spain.
• The funding and construction market is dominated
  by local banks and local contractors
  respectively.
• Portugal
• Portugal started its road programme (SCUT) in
  1995 and has raised over 6 billion over the last
  nine years for this programme alone.
• The programme has however slowed down in 2003/4
  as the Government comes to grips with the
  affordability problems caused by the shadow toll
  programme.
• Recently the Government announced that it will
  convert some of the SCUTs to real toll
  concessions.
• This should lead to interesting negotiations with
  the operators and lenders in terms of
  compensation required for the rebalancing of the
  project risks

An Overview
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European Roads- An overview

• Netherlands
• Successfully completed two PPP Road transactions
  (the N31 and N50/A59 road projects).
• Recovering from a slowdown in deal flow due to
  elections and political concerns, the Netherlands
  is now planning a third road PPP the A4
  motorway south section.
• Ireland
• Closed its first two PPP road transactions in
  2003/4 (the N1/M1 Dundalk and the N4/N6
  Kilcock-Kilbeggan).
• Has a programme of seven PPP roads in total.
• Programme is backed by significant EU finding (up
  to 65 of construction costs).

An Overview
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European Roads- An overview

• Norway
• Successfully closed its second road PPP deal last
  year and is currently preparing for bidding for
  the third PPP road transaction.
• UK
• Three road transactions reached financial close.
• The largest transaction was the A1(M), followed
  by the M77 and the A249.
• UK Highways agency is currently considering
  developing large scale project finance
  transactions for the widening of the M25, M6 and
  M1 which could be worth over 1 billion.
• Austria
• Successfully closed its first road deal which was
  financed mainly on the back of securitisation of
  real tolls to be paid by heavy freight traffic in
  the country.
• Currently planning a 3 billion PPP road
  programme.
• France, Greece and Germany are also undertaking
  significant road transactions.

An Overview
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Norway - Case Study

• Ernst Young advised the Norwegian Public Roads
  Administration (Directorate of Public Roads) on
  the establishment of a US500m PPP programme for
  a number of road schemes.
• The first project, the expansion of the existing
  infrastructure and the design, build, finance,
  operation and maintenance of a 27 kilometre
  stretch of the E 39 Klett Bårdshaug in
  Sør-Trøndelag highway, reached financial close in
  June 2003.
• The second project, the E 39 Lyngdal
  Flekkefjord in Vest-Agder County is completed,
  and the third project, the 18 Grimstad
  Kristiansand in Aust-Agder County, is still in
  procurement.
• Our work involved the analysis of different PPP
  models that deliver the involvement of private
  sector resources while being suitable to the
  Norwegian market. In addition the procurement
  strategy and project structure was developed to
  take into account the specific characteristics
  involved in road projects, including tunnelling
  solutions, soil conditions and remote locations.
  The project took account of analysis of DBFO road
  procurement in other countries such as the UK and
  Canada and improved upon these.

An Overview
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Norway - Case Study

• Government retains ground and traffic risks
• No payments made prior to road completion. Once
  completed, the payments are flat and tied to a 25
  year term made up of interest rate swapped debt
• The private company can refinance with out undue
  burden
• Tolls are collected by the state / community to
  avoid issues regarding toll rates and traffic
  diversion
• Government retains ownership of the ground and
  has certain risks tied to road design and
  planning
• Private companies will bear the construction and
  maintenance risk over the entire period of the
  concession, will be paid for access and can
  receive extra payments for reduced traffic
  accidents and fatalities

Summary
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South Hampshire Rapid Transit Case Study

• Ernst Young are Financial Advisers to
  Portsmouth City Council and Hampshire County
  Council, joint promoters for a 14km light rail
  transit route from Fareham to Portsmouth via a
  1km tunnel under Portsmouth Harbour. The 200m
  scheme is to be procured on a DBFO basis and is
  currently subject to competitive tender.
• Our role encompasses commercial structuring,
  financial modeling, PQQ and ITN bidder
  evaluation, affordability analysis and detailed
  negotiation to reach financial close.
• As financial advisors we have developed a payment
  mechanism, reflecting the needs of users, and a
  revenue sharing mechanism that allows the
  Promoters to share in the success of the project,
  if these exceed the funders forecasts.

An Overview
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Athens Metro System Case Study

• Ernst Young was appointed as leader of a
  multi-disciplinary advisory team and advised the
  Greek Ministry of Transport (GMOT) on the
  development of the 250 million Athens Light Rail
  Tramway project.
• This assignment included drafting the commercial
  and procurement framework by which the GMOT could
  deliver their initiatives before the commencement
  of the 2004 Olympic Games.
• Being one of the first PPP transactions in Greece
  and due to the complexity of the current
  transport market, Ernst Young held a series of
  workshops addressing various integration issues
  and analyzing a number of procurement options.
• Specific work focused on securing the most
  appropriate operating structure consistent with
  the Promoters strategic objectives.
• Additionally, Ernst Young approached financial
  institutions and banks to ensure adequate
  financing is secured for the project.

An Overview