The Big5 Exhibit Education Workshop Programme Dubai, November 17th 2014 Structuring PPP to fund public infrastructure projects Portrait of Cristoforo Colombo – © New York, Metropolitan Museum Eng. Alberto Germani UNECE Member of PPP ToS Portrait of Lorenzo de’ Medici - © Florence, Galleria degli Uffizi © 2014 A. Germani Structuring PPP to fund public infrastructure projects – Dubai Nov 17th, 2014 1 UECE activity in PPP: theObjectives Internationaland Centre of Excellence deliverables The UNECE ICoE was established in 2012 to: 1. 2. 3. Identify international PPPs best practices and develop international PPPs standards Assist governments to implement best practices successfully Encourage shared learning especially between countries new to PPPs and those with mature PPPs programmes © 2014 A. Germani Structuring PPP to fund public infrastructure projects – Dubai Nov 17th, 2014 2 Status of UNECE International PPP Centres Status Centre Location Partners Est. PPP in Health Philippines ADB, WHO Est. PPP in CIS Countries Russian Federation Vnesheconombank Prepar. Legislation France UNCITRAL Prepar. Roads and Highways India Prepar. ICT/ broadband Azerbaijan Prepar. Flood Control The Netherlands Prepar. Green PPP Republic of Korea Prepar. PPP in renewable energy Morocco Prepar. Water and Waste Water Tbd Prepar. Regional development Russian Federation Consid. Islamic Finance UAE © 2014 A. Germani PPP Govt. Structuring PPP to fund public infrastructure projects – Dubai Nov 17th, 2014 3 UNECE International PPP Centre of Excellence website http://www.unece.org/ceciwelcome/areas-of-work/public-privatepartnerships-ppp/icoeppp.html © 2014 A. Germani Structuring PPP to fund public infrastructure projects – Dubai Nov 17th, 2014 4 LONDON OLYMPICS 2012, ACQUATICS CENTRE PPP founding principles LONDON OLYMPICS 2012, ACQUATICS CENTRE © 2014 A. Germani Structuring PPP to fund public infrastructure projects – Dubai Nov 17th, 2014 5 PPP contractual assignments Assignments to private party on project finance contract basis: Design Finance (wholly or in part) Build (Own - optional) Operate & Maintain Collect the revenues from user charges (tolls), or Charge Public side with regular payments related to: asset availability service performance traffic (shadow tolls) PPPs are long-term arrangements in a whole-life project perspective © 2014 A. Germani Structuring PPP to fund public infrastructure projects – Dubai Nov 17th, 2014 6 PPP in International Practice PRIVATE responsibility PUBLIC responsibility Type of contract Object of contract TP (Traditional Procurement) D&B (Design & Build) BOT (Build, Operate and Transfer) Concessions JVs DBFO (Design, Build, Finance and Operate) BOO (Build, Own and Operate) Construction Design Construction Design Funding Construction O&M Design Funding Construction O&M Design Funding Construction O&M Role of Public party Owner Funder Operator Owner Funder Operator Owner (Funder) Owner Owner Funder Contractor Operator Role of Private party Contractor Designer Contractor Funder Contractor Operator Funder Contractor Operator Owner Funder Contractor Operator Source: European Commission, Guidelines for successful PPPs, March 2003 © 2014 A. Germani Structuring PPP to fund public infrastructure projects – Dubai Nov 17th, 2014 7 Service pricing through tariff system PPP revenues generated from: a. User charging (tolling): final users pay for the services provided (i.e. toll roads, utilities, urban transport, parking) b. Public payments (availability-based): the State is the main payer for the services provided to the final users (i.e. non-toll roads, healthcare, education, social housing) Additional revenue sources managed by Licensees: c. Secondary development exploitation (i.e. real estate, logistics) d. Other commercial revenues (shops, hotels, petrol stations) e. Ancillary revenues (advertising) The right to collect additional revenues reduces tolls / public payments © 2014 A. Germani Structuring PPP to fund public infrastructure projects – Dubai Nov 17th, 2014 8 NEW LUCCA HOSPITAL, ITALY Risk allocation in PPPs NEW MILAN NIGUARDA HOSPITAL, ITALY © 2014 A. Germani Structuring PPP to fund public infrastructure projects – Dubai Nov 17th, 2014 9 PPP and financial risks PPP is: “(…) where the public sector contracts to purchase quality services on a long-term basis so as to take advantage of private sector management skills incentivized by having private finance at risk.” (“Public Private Partnerships – the UK Government’s Approach”, 2000) © 2014 A. Germani Structuring PPP to fund public infrastructure projects – Dubai Nov 17th, 2014 10 Risk allocation (1) general and contractual Risk Description Political risks Change of Government policy, expropriation of land, etc Legal risks unforeseen changes in legislation and regulations Private Public Force Majeure qualifying events (weather, earthquake, natural disasters, etc) Land Acquisition right-of-way Design & Construction Cost overrun, time delay, noncompliancy with specs Operation & Maintenance Risks faced during operation, routine and heavy maintenance Traffic loading Excess traffic loading © 2014 A. Germani Shared Structuring PPP to fund public infrastructure projects – Dubai Nov 17th, 2014 11 Risk allocation (2) financial and market-related Risk Description Private Public Shared Interest rate fluctuation (a) Changes in interest rates between final offer and financial close Interest rate fluctuation (b) Changes in interest rates after financial close Debt margins movements Increase in debt margins between final offer and financial close Inflation indexation Annual inflation rate Exchange rate De-pegging of AED Demand (traffic) risk User-charged infra (i.e. Toll road) Demand (traffic) risk Availability payment-based infra (i.e. Hospital) © 2014 A. Germani Structuring PPP to fund public infrastructure projects – Dubai Nov 17th, 2014 12 Equitable Risk Allocation “Each risk is allocated to the party best placed to manage it (= at lowest cost)” Three major risks are to be dealt with in PPP infra projects (cfr. Eurostat Decision of 11.2.2004): Construction Risk • Cost overruns • Time delays • Non conformity Availability Risk • Underperformance during O&M Demand (Traffic) risk: • Users less than expected - Cash flow not enough to repay the investment In PPPs Construction and Availability risks are always allocated on private side, whereas for the Demand risk it depends. © 2014 A. Germani Structuring PPP to fund public infrastructure projects – Dubai Nov 17th, 2014 13 Project risk life cycle in PPP DESIGN STAGE CONSTRUCTION STAGE OPERATIONAL STAGE Risk exposure COMPANY RISK ON O&M FINANCIERS RISK PROJECT DEVELOPER RISK COMPANY RISK ON MARKET START-UP (DEBT REIMBURSEMENT STARTS) Years Importance of proper Risk assessment to be carried out by both Parties © 2014 A. Germani Structuring PPP to fund public infrastructure projects – Dubai Nov 17th, 2014 14 PERTH NEW STADIUM COMPLEX, AUSTRALIA PPP Financial aspects LONDON EMIRATES STADIUM< UK © 2014 A. Germani Structuring PPP to fund public infrastructure projects – Dubai Nov 17th, 2014 15 Bankability Any project able to generate enough cash flow to: • Service debt(s) to Lenders • Generate value for Project Sponsors Stakeholder Interest in PPP delivery Goal SPONSORS (Equity providers) Yelding Stable, risk-balanced returns (Project IRR, Equity IRR) LENDERS (Debt providers) Bankability Loan(s) full repayment (Cover Ratios ADSCR, LLCR > 1.x) GOVERNMENT (Service payments) Value for Money Minimize public expenditure (subsidies, fees, tariffs) © 2014 A. Germani Structuring PPP to fund public infrastructure projects – Dubai Nov 17th, 2014 16 Cash flow across project life-cycle PROJECT NET CASH FLOW - UNDISCOUNTED 15,000,000,000 10,000,000,000 Project Cash Flow (Dirhams) 5,000,000,000 Payback period 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 -5,000,000,000 -10,000,000,000 -15,000,000,000 Years © 2014 A. Germani Structuring PPP to fund public infrastructure projects – Dubai Nov 17th, 2014 17 The discounting effect on cash flow PROJECT NET CASH FLOW - UNDISCOUNTED VS. DISCOUNTED 15,000,000,000 10,000,000,000 5,000,000,000 Payback period 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 -5,000,000,000 -10,000,000,000 -15,000,000,000 Cumulated Cash Flow - Undiscounted © 2014 A. Germani Cumulated Cash Flow - Discounted Structuring PPP to fund public infrastructure projects – Dubai Nov 17th, 2014 18 PPP and Islamic Finance Islamic Finance is a unique opportunity for funding PPPs, if properly blended with principles governing project finance arrangements. Three main issues need to be addressed: Interest paid on debt (riba) • Islamic principles generally forbid charging interest merely over money lent Ownership over the asset object of the deal • Lenders have to take up ownership of the asset being build, even shortly Avert excessive risks in transactions (gharar) • This can be ad odds with PPP arrangements, given the inherent uncertainty over asset being build and future returns © 2014 A. Germani Structuring PPP to fund public infrastructure projects – Dubai Nov 17th, 2014 19 Successful Case Studies © 2014 A. Germani Structuring PPP to fund public infrastructure projects – Dubai Nov 17th, 2014 20 Metro projects: general remarks • High Capital intensive • Major construction risks (tunneling underground, geotechnical risks, findings) • Commercially suitable only for major traffic flows (above 15.000 pax/hour/direction) • Traffic risk difficult to manage • Cash flow from ticketing highly related to transport policies adopted © 2014 A. Germani Structuring PPP to fund public infrastructure projects – Dubai Nov 17th, 2014 21 Florence Tramway system (Italy) Lenght of tramway network: 21,0 kms total on 3 lines Capex: € 344 million (Y2014) Contract: 35–year Concession for: - DBFOM of lines 2 and 3 - OM of line 1 (construction procured conventionally) Status: awarded in 2005, line 1 operational since 2010, lines 2 & 3 constrruction underway Risk category Risk Bearer Construction private Availability private Demand (Traffic) shared © 2014 A. Germani Provision 46% Capex through public grant First 10-year public guarantee provided on traffic revenues Structuring PPP to fund public infrastructure projects – Dubai Nov 17th, 2014 22 New Mestre General Hospital (Venice, Italy) Project: New 680-bedded General Hospital Capex: € 236 million (Y2002) Contract: 29 year- (incl. 4 years construction) DBFO concession inclusive of design, build, finance, technical maintenance and non-clinical services provision Status: awarded in 2002, operational since 2008. Risk category Risk Bearer Construction private Availability private Demand shared © 2014 A. Germani Provision € 105 million State subsidy (45% Capex) EIB refinancing after completion KPI-linked availability payments Profit-sharing on laboratory analysis Structuring PPP to fund public infrastructure projects – Dubai Nov 17th, 2014 23 Contacts Alberto Germani MEng MBA CEng PMF Project Management and Finance PO Box 63752 Abu Dhabi, United Arab Emirates T: +971 07 203 1293 M: +971 56 612 8803 E: [email protected] © 2014 A. Germani Structuring PPP to fund public infrastructure projects – Dubai Nov 17th, 2014 24
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