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The PPP Landscape

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    2. The PPP Landscape
    Activity and markets 1990-2008, financial structures and post-credit
    crunch outlook
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    Lecture 2 Agenda

       Objectives

       Definitions (again)

       How many PPPs are there?

       The Project Finance Market and PPPs

       Have Risks Materialised for PPPs?

       The Future of the PPP Market
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    Objectives

       Understand the scale of the PPP story (compared to std
        provision of public services, project sizes, number of projects
        etc)

       Understand how projects are structured in the real world
        (project finance)

       Understand the role of the different actors are involved in
        projects

       Understand the recent developments and the possible
        future for the PPP market in the current economic and financial
        context
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    Definitions (again)

       What do we call a PPP in the real world?

       While there is a PPP model based on the principle of
        transferring risk to the private sector to minimise delivery costs,
        in reality, projects can receive varying degrees of government
        support:
           Minimum revenue guarantees
           Debt guarantees
           Termination payments
           Tariff/ Unitary charge reviews

       The relevant definition for the PPP market data today: a public
        infrastructure project developed and financed mostly by
        the private sector through a long-term contract.
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    Definitions: PPPs in which sectors?

       Relevant Sectors: Transportation, Water & Waste, Municipal
        and Central government services (property), Health, Education

       Exclude Energy and Telecoms (straight privatisations)

       A wide array of services can be delivered as PPPs (in theory)
           Police and fire brigade accommodation
           Non-combat defense systems (e.g. Strategic Transport)
           Hospitals
           Training facilities
           IT systems for central government
           …
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    How Many PPPs?

       PPP activity really took off in the early 1990s everywhere in the
        world and has since known a constant development even
        though there have been periods of retrenchment, especially in
        emerging market where political risk and economic crisis have
        hampered numerous contracts.

       But measuring PPPs is difficult

       We conducted a study with the EIB in 2007 to understand the
        size of the PPP phenomenon in Europe.
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    How Many PPPs?
    Number of Deals and Deal Volume for PPPs in the EU 1990-
    2006
           In Europe, between 1990 and 2006, more than one thousand PPP contracts
            have been signed in the EU, representing a capital value of almost 200 billion
            euro (current prices).
    160                                                                                                                             35,000


    140                                                                                                                             30,000

    120
                                                                                                                                    25,000

    100
                                                                                                                                    20,000
     80                                                                                                                                      Value of signed projects (euro mill.)
                                                                                                                                    15,000   Number of signed projects
     60

                                                                                                                                    10,000
     40


     20                                                                                                                             5,000


        0                                                                                                                           0
             1990
                    1991
                           1992
                                  1993
                                         1994
                                                1995
                                                       1996
                                                              1997
                                                                     1998
                                                                            1999
                                                                                   2000
                                                                                          2001
                                                                                                 2002
                                                                                                        2003
                                                                                                               2004
                                                                                                                      2005
                                                                                                                             2006
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    How Many PPPs?
    In Europe, PPPs are of macroeconomic significance only in the UK,
    Portugal, and Spain.

                                                                              Greece
                                                                              0.56%
                                                       Czech
                                                        Rep     Finland
                                         Belgium                           Holland       Italy
                                                       0.19%     0.19%
                                          0.66%                             1.03%      2.06%
                                                   Austria
                                                   0.19% France               Irleland
                                                     Cyprus 2.81%              0.66%
                                                     0.28%
      Number of PPPs in the EU                                 Germany
                                                      Danmark 2.44% Hungary
                                                                                       Poland
                                                                                  Latvia
                                                                                        0.38%
                                                       0.00%                                      Romania
     1990-2006: 1000+ Contracts                                         0.75% 0.09%
                                                                             Malta
                                                                                          Portugal 0.28%
                                                                                           2.25%
                                                                            0.09%
                                                                                      Slovakia
                                                                                       0.09%

                                                                                            Slovenia
                                                                                             0.09%
                                                                                Spain
                                                                                8.63%

                                                                                         Sweden
                                                                                          0.09%




                        United Kingdom
                            76.17%
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    How Many PPPs?
    In Europe, PPPs are of macroeconomic significance only in the UK,
    Portugal, and Spain.

             Investment Volume of PPPs in the EU 1992-2006:
                              Eur200+bn
                                                   Belgium
                                                                          Danmark
                                                    1.08%
                                                                           0.00%
                                               Austria Finland
                                               0.63% 0.22%
                                                                 France
                                          Czech Rep Cyprus       3.94%
                                            0.40%   0.36%
                                                                  Germany
                                                                   2.91%
                                                                         Greece
                                                                          3.90%
                                                                               Holland
                                                                               1.71%      Hungary
                                                                                           2.72%
                                                                                    Irleland    Italy
                                                                                     0.69%     3.73%
                                                                                                    Latvia
                                                                                       Malta Poland 0.04%
                                                                                       0.05% 0.93%

                                                                            Portugal
                                                                             5.78%
                         United Kingdom
                             57.74%
                                                                                       Romania
                                                                                        0.06%
                                                                       Spain                   Slovakia
                                                                      12.78%           Slovenia 0.05%
                                                                                        0.02%



                                                                 Sweden
                                                                  0.25%
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    How Many PPPs?
    UK PFI Number of Contracts


                 Number of PFI Contracts Signed
                   in the UK: 812 (end 2006)
                                    Other   Transport
                                    11%        6%
                                                        Accomodation
               Municipal services                           13%
                      9%


                     Defence
                       5%



                                                            Schools
                                                             25%

                       Hospitals
                         31%
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    How Many PPPs?
    UK PFI Investment Volume


                     Investment Value of UK
                PFI Projects: Eur112bn (end 2006)

                 Municipal services
                        4%               Other
                                          9%
                     Defence
                       9%
                                                           Transport
                                                             36%


                             Hospitals
                               20%


                                          Schools
                                           13%
                                                    Accomodation
                                                        9%
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    How Many PPPs?
    EU PPPs ( excl. UK) Number of Contracts


          Number of PPP Contracts Signed in the EU
                 (excl. UK): 254 (end 2006)

                                 Other
                                 24%
                Municipal services
                     0.39%


                             Defence
                               1%
                                              Transport
                             Hospitals          59%
                               7%

                                Schools
                                  4%
                              Accomodation
                                  5%
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    How Many PPPs?
    EU PPPs ( excl. UK) Investment Volume


                  Investment Value of PPP Contracts
            Signed in the EU (Excl. UK): Eur83bn (end 2006)

                            Municipal services
                                 0.01%
                   Defence                        Other
                    0.35%                        10.46%

             Hospitals
              3.20%
                    Schools
                     0.97%

             Accomodation
                1.84%




                                                          Transport
                                                           83.17%
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    How Many PPPs?
    EU PPP (excl. UK) Number of Transport Contracts


         Number of Transport PPP Contracts Siged in the EU
                     (Excl. UK): 149 (end 2006)
                                             Airport
                                              5% Bridge
                                                     3%
                                    Urban
                                   railway
                                     11%            Port
                          Tunnel                    9%     Rail
                           9%                              3%




                            Road
                            60%
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    How Many PPPs?
    EU PPP (excl. UK) Investment Volumes in Transport


         Investment Value of Transport PPPs Signed in the EU
                        (excl. UK): Eur68.5bn
                               Urban railway
                                    5%         Airport
                             Tunnel             11%
                              5%                         Bridge
                                                          4%
                                                             Port
                                                             2%


                                                         Rail
                                                         6%




                               Road
                               67%
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    How Many PPPs?
    Median Project Size in the UK

      500
            Median 95-00

            Median 01-06
      400




      300




      200




      100




        0
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    How Many PPPs?
    In Emerging Markets,15 years of water and transport PPPs:
    2600+contracts and almost US$500bn of committed investment


                 Number of PPP Contracts Signed in Developing
                     Countries: 2656 contracts (end 2007)




           Water and sewerage
                  28%




                                                  Transport
                                                    72%
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    How Many PPPs?
    Transportation is more active but more volatile

                    Number of PPP Contracts Signed Each Year in
                         Developing Countries 1990-2007
    180

    160

    140

    120

    100

     80

     60

     40

     20

      0
          1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

                                        Transport    Water and sewerage
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    How Many PPPs?
    PPP Investment in emerging markets follows the same pattern
    than in Europe so far

          Volume of PPP Investement Committed in Developing
                    Countries: US$480bn (end 2007)




             Water and sewerage
                    18%




                                                Transport
                                                  82%
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    How Many PPPs?
    …but market sentiment is much more volatile than for
    European PPP Investment
                              Investment Commitments to PPPs
                              in Developing Countries 1990-2007
    70,000


    60,000


    50,000


    40,000


    30,000


    20,000


    10,000


        -
             1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

                                           Transport   Water and sewerage
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    PPPs vs. Traditional Procurement
    What is the financial scale of PPPs in Europe?

       “PFI continues to play a small but important role in the
        Government’s investment in public services… This means that
        the proportion of government investment in public services
        through PFI remains relatively stable at 10 to 15 per cent… and
        PFI is expected to account for around 10 per cent of total
        investment in public services in 2005-06… The vast majority of
        increased investment in the UK’s public services has been
        conventionally procured.”

       Still the UK is by far the biggest user of PPPs for procuring
        public services. In comparison, in most countries, the size of
        PPP expenditure vs. total public investment is very small.
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    PPPs vs. Traditional Procurement
    Public investment and PPPs (averages 1995-2000
    and 2001-06, in percent of GDP)
     5.0



     4.0



     3.0



     2.0



     1.0



     0.0
           95-00

                        01-06

                                95-00

                                             01-06

                                                     95-00

                                                                  01-06

                                                                          95-00

                                                                                       01-06

                                                                                               95-00

                                                                                                            01-06

                                                                                                                    95-00

                                                                                                                                 01-06

                                                                                                                                         95-00

                                                                                                                                                      01-06

                                                                                                                                                              95-00

                                                                                                                                                                           01-06

                                                                                                                                                                                   95-00

                                                                                                                                                                                                01-06

                                                                                                                                                                                                        95-00

                                                                                                                                                                                                                     01-06
                   FR                   GE                   GR                   HU                   IR                   IT                   NL                   PT                   SP                   UK



                                                     Public investment (flow)                               PPP (estimated flow investment)
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    PPPs vs Traditional Procurement
    PFI and Public Investment in the UK as a proportion of
    GDP
    6
                                                     without PPP

                                                     with PPP
    5



    4



    3



    2



    1



    0
        1970   1975   1980   1985   1990   1995   2000             2005
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    PPPs & Traditional Procurement
    Conclusions

       PPPs have been developing very fast but from a low base
           In mature markets growth rates are abating

       PPPs in Europe have known a much more stable, policy-driven
        development than in developing countries

       PPPs represent only a marginal part of public service
        procurement
           But they tend to be big projects
           … and politically very visible

       Even in the UK where PPPs have been consistently and
        systematically pushed by the government for 15 years, they do
        not represent more than 1/5 of procurement.
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    PPPs & Project Finance
    A subset of a much larger financing market

       “The raising of funds to finance a single indivisible large scale
        capital investment project, whose cash flows are the sole source
        to meet financial obligations and provide returns to investors”
        (Dailami and Hauswald 2000).

       Many different types of large, capital-intensive projects are
        developed using project finance (PF) including toll roads, power
        plants, airports, casinos, oil and gas facilities, real estate etc.

       Most PPPs are just anther type of project finance transaction
        with their own risk profile and characteristics. To understand where
        PPPs draw their financial strength from, one has to look at and
        understand the project finance market.
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    PPPs & Project Finance
    The PF market spans all infrastructure & energy

          Global Project Finance Lending in 2008: US$250bn
                               Telecommunications
                                      3%
                                     Water & Sewerage
                              Mining        1%            Agriculture &
                                5%    Waste & Recycling     Forestry
                                              0%               0%
                           Industry
                             5%
              Petrochemicals
                    5%
                                                                          Power
                                                                           36%
              Other PPPs
                  8%




                  Oil & Gas
                     15%
                                                              Transportation
                                                                  22%
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    PPPs & Project Finance
    The PPP market is only 30% of the global PF market

              Global Project Finance Lending to PPPs
                         in 2008: US$80bn
                                            Water & Sewerage
                                                   4%

                        Waste & Recycling
                               1%
                                                               Other PPPs
                                                                  26%




              Transportation
                  69%
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    PPPs & Project Finance
    Financing characteristics

       High leverage (usually 70% of debt, up to 100%!)

       Special Purpose Vehicle (Project Company) i.e. off-balance sheet
        for the developer

       Complex network on contracts with:
           Granting authority
           Subcontractors
           Lenders
           Insurers

       Revenue model
           Tolls/Tariffs
           Shadow Tolls
           Availability payments
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    PPPs & Project Finance
    Key actors involved


                                              Equity
                                            Investors
                                          [developers]



                 Final Users
                                                                    Debt
                 [the Public,
                                                                 Providers
                Government
                                                                  [banks or
                  Dpt, local
                                                                bond market]
                authority, etc]
                                           Project
                                          Company



                              Sub-
                                                         Granting
                           Contractors
                                                         Authority
                            [Design,
                                                          [Public
                          Construction,
                                                          Client]
                            FM, etc]
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    PPPs & Project Finance
    Initial financing mix
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    PPPs & Project Finance


                                                    Project
                                                   Company
                                                 (contracts with
                                                  public client)




                                                     Project
                                                   Developers
                                                 (invest equity)




                               Construction
                                                                       Lenders
                                companies
                                                                   (originate loans
                                 (design +
                                                                      + monitor)
                                supervise)




                              Subcontractors                           Debt
                              (Build + operate                      Syndication
                                   + FM)                              Market



                 Sub-
            Subcontractors
                                                  Secondary                              Debt
               (routine
                                                 Market for PPP                       Refinancing
             maintenance,
                                                     Equity                             Market
               catering,
             security, etc)
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    PPPs & Project Finance
    The key role played by banks

        The role of private lenders is not simply to supply funds to a
        project, but to have strong incentives to ensure a project’s financial
        sustainability

       Step-in rights

       Added-value:
           Due diligence
           Risk allocations
           Contract enforcement

       Project finance is about fostering commitment and reducing
        information asymmetries through monitoring and address the
        biggest concerns fund in long-term contracts demanding large
        upfront investments.
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    PPPs & Project Finance
    Competition for funding infrastructure projects has increased over the
    years with more than 230 banks now involved globally
+
    Issues with Project Finance & PPPs
    1. Transaction costs are high

       Several early UK studies (BEC 1995; Butler and Stewart 1996)
        found average tender costs expressed as a percentage of
        expected total costs, across projects of all sizes, to be between
        two and six times higher in PPPs than in traditional
        procurement projects.

       More recent research confirms that high bidding costs push
        companies to include the cost of past lost bids in current bids to
        try and recoup the former (Poulter and Franks 2001).

       Dudkin and Välilä (2005) estimate overall transactions costs
        (including bidding costs) related to the procurement phase to
        be about 10 percent of project value for PPPs.
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    Issues with Project Finance & PPPs
    1. Transaction costs

       The cost of financial and legal advisors is identified as a key
        aspect of these costs. “We cannot afford to keep spending at
        this level on the costs of the process, as excessive costs do not
        provide value” (Richard Abadie, former Head of HMT PFI
        Taskforce, quoted in S&P 2006:4)
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    Issues with Project Finance & PPPs
    Refinancings

       It may be possible to refinance the PPP at a lower rate of interest because:
           The market is more used to PPPs and their risk profile
           The project is past its construction phase and is performing well
           Interest rates are lower (credit cycle)
           The contract has been extended

       The resulting savings on debt service are usually transformed on shareholder
        distributions: because there is a lot of debt (90%) and not much equity, saving
        a little on debt service and transforming it into dividends can mean increasing
        returns significantly.

       This is also an opportunity to borrow more and pay more dividends to equity
        holders sooner

       Refinancings create new risks and higher liabilities for the public sector

       Refinancings used to be almost automatic. In 2002, the British Government has
        imposed a ‘sharing rule’ which says that 30% at least of the gains should be
        returned to the tax payer. Refinancings are now much rarer since 2004.
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    Issues with Project Finance & PPPs
    The Secondary Market for PPP Equity

       The secondary PFI market was developed in 2002-3 in the UK. It
        consists of ‘commoditising’ the equity sunk in PPP project
        companies.

       In 2006, 40 per cent of projects had had a change in the investors
        in the SPV.

       A number of funds, either pension and mutual funds or dedicated
        infrastructure funds, have been buying these assets, which have
        an attractive risk/return profile once they enter the operational
        phase.
           “a 12% deposit account?”

       It allows developers who had equity sunk into these projects to
        free-up capital and also to realise undeniable profits
+
    Issues with Project Finance & PPPs
    The Secondary Market for PPP Equity

        Why can it be a problem?

       The idea of aligning incentives between developers and public
        sector in a long-term partnership relies on the continued
        involvement of the private sector throughout the life of the contract
        and with its equity stake as the main way to punish the firm if it
        does not performs

       Without the ability to punish the developer by blocking equity
        distributions to the service provider, the monitoring role of the
        banks is further diminished

       The possibility to exit early a PPP tends to favour a more short
        term approach on the part of equity investors/developers who
        them may not engage in the LCC and efficiency promotion that
        they otherwise should do.
+
    Issues with Project Finance & PPPs
    Project Finance and PPPs are about Commitment

       Project finance is expensive but it aims to reduce information
        problems in contracts and create viable long term investments
        in large sunk assets: perfect for PPPs

       But a secondary market for PPP project equity…
           …puts breaks on the commitment of the private sector to making
            projects work
           …re-introduces information asymmetries that had been reduced by
            project finance and monitoring
+
    Have Risks Materialised?
    1. Construction and operations

       PPP projects are overwhelmingly finished on time and on budget. There
        also cases where construction problems led to project failures.
           But the projects that were going to cost too much in risk premia were abandoned
            (e.g. light rail in the UK)

       Major maintenance (10 years) remains mostly untested on PPP contracts
        in Europe. There are also cases of problems due to unexpected inflation
        of maintenance costs (e.g. road surfacing)

       When ex post construction costs turned out to be higher than anticipated
        in PPPs in Europe, it was generally caused by a lack of clear
        specifications by the public client: “in almost all cases of cost overruns
        and delays which were not caused by exogenous factors, the reason was
        changes in the technical specifications or work scope after the contracts
        have been awarded”. (Thomson and Goodwin 2005)
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    Have Risks Materialised?
    2. Demand/ Traffic

       Demand risk, when it exists, is what creates problems for
        projects. Some projects have zero RoE and cannot service senior
        debt without restructuring because of demand risk.

       Many volume-based projects have performed below the base
        case. Roads tend to have on average a 20% optimism bias in their
        private traffic forecast (S&P 2005).

       This is often aggravated by political risk with regards to tariffs
        (tolls) (EV 2005). There can be divergence between interest of
        central government pushing for PPPs and local governments
        cajoling users (hence free competing roads etc.)

       Conversely, PPPs that do not carry volume/demand risk
        perform well financially. Rating stability of health care, defence
        and accommodation PFI is due to absence of significant volume
        risk.
+
    Have Risks Materialised?
    3. Political Risks

       In numerous countries, particularly emerging markets, PPPs
        have had serious problems with local politicians, especially
        after a change of government or if the PPP was sponsored by
        the central government but considered to be a threat by the
        local government or former public sector supplier.

       The biggest problems arise when end-users pay a tariff and the
        government refuses to implement planned tariff increases

       In the EU, the main political risks spring from unforeseen
        events that the government refuses to insure (e.g. A55 and foot
        our mouth outbreak in Wales)
+
    Have Risks Materialised?
    4 Other risks

       Technical failure is rare. In its review of PPPs, the EIB did not
        find projects with technical problem (2005). Likewise, less than
        1% of deals reviewed in the S&P project finance sample (2004)
        failed (default) due to technical reasons.

       Insurance costs have risen dramatically since 9/11. It affected
        pre 9/11 projects negatively and insurance costs now tend to
        be shared between public and private parties. (S&P 2005)
+
    Have Risks Materialised?
    5. Risks for lenders and equity investors

       It is ‘necessary for private capital to be at risk for it to take
        responsibility for the works it carries out. (…) It is also important
        that the private sector funders do not infer from any
        government involvement (…) that it is in any way underwriting
        the finance raised.” HMT (2003)

       In the UK, where demand risk occurred and penalties were
        incurred they were absorbed by contractors without impacting
        the financial performance of the project (S&P 2005). But this
        may demand to restructure the debt package.
+
    Have Risks Materialised?
    Project finance almost never defaults (even post 2008)

       PF lending has proven extremely resilient to adverse economic conditions,
        with low default rates and very high recovery rates (S&P 2004),
        systematically outperforming pools of equivalent corporate loans.

       Using historical data for a sample of 759 loans, Standard & Poor’s
        conducted an analysis of project finance loans’ expected losses or EL
        (which is the ‘probability of default’ or PD multiplied by ‘loss given default’
        or LGD).
           They find that the LGD of PF loans is quite low at 25% on average and that,
            thanks to restructurings, 100% of loan values were maintained.
            They also find that PF loans have better LGD rates than secured debt, senior
            debt, and senior unsecured.
           According to these findings, static pools of PF loans would have a ten-year
            cumulative average probability of default of about 7.5% and a one-year average
            probability of default of approximately 1.5% (Berner 2002).
+
    Have Risks Materialised?
    The Risk/Return Perspective

       High levels of leverage indicate generally low asset risk (Esty
        2002) and PF debt tends to be priced below equivalent corporate
        debt (Kleimeier and Megginson 2000).

       In another study of the credit performance of 217 infrastructure
        projects over a decade, Standard & Poor’s confirms that instances
        of default are rare (less than 9% of cases) and recovery rates very
        high.

       Mystery question: If PPPs never fail from the point of view of
        investors, why does PPP debt cost 120bps? And why are equity
        returns in the 12/15% bracket in Europe?
           EIB research also shows that construction margins in PPPs can be as
            high as 30% when in traditional procurement they are 0–5%
+
    The Future of the PPP Market
    1. 2008 was not a bad year for infrastructure project
    finance
       The global loan figures stood at US$250.5bn in 2008 – up from US$220bn in
        2007.

       Loan volumes continued into 2008 and only slowed down in the summer, and
        then hit very uncertain territory when Lehman failed in September.

       The bond market had already disappeared by then. Project bonds totalled just
        US$11.9bn in 2008 compared with US$26.5bn in 2007.

       The Americas loans market showed little change over 2007, down to US$42bn
        from US$44.5bn. Similarly, the Europe Middle East & Africa (EMEA) market
        showed little change – albeit from a stellar 2007, rising from US$130.7bn to
        US$138bn.

       The main growth in the loans market in 2008 came from Asia-Pacific. Volumes
        jumped from US$44.8bn to US$70.4bn. Both Australia and India leapt higher,
        to US$21.2bn and US$19.2bn respectively.
+
    The Future of the PPP Market
    2. Until 2007, the appetite for infrastructure asset was
    voracious
       In recent years, the demand from investors for high quality
        infrastructure assets had increased considerably
             Substantial liquidity was available to finance projects and
              secondary market acquisitions
             Competition for these assets was increased by the arrival of
              mutual and pensions funds in the infrastructure arena

       “The attention of sponsors and equity investors has often
        focused on the ability of projects to generate free cash flow for
        re-gearing and distributions, rather than to service debt”. (Fitch
        Ratings 2009)

       Monoline insurers enabled even longer term debt to be raised
+
    The Future of the PPP Market
    3. But times have changed even for project finance

       Infrastructure project refinancing/re-gearing is unlikely in the next 24 months

       The project bond market has become completely inactive but it will rise again soon

       Experience shows that project finance lenders have traditionally taken the time to
        restructure financings (including the extending of maturities) when a problem has emerged,
        rather than enforce securities and/or liquidate the assets. This is feasible because of the
        long-term nature of the asset.

       So there should not be a higher number of defaults on projects in future months but
        possibly a higher number of debt restructuring

       Long term financing is typically for the bond market (capital markets) rather than banks.
        But banks have played a key role in project finance especially because of their ability to
        deliver flexible credit (term and price)

       For now banks will need time (maybe a decade) to be fully back in the game and in the
        meantime developers may have to make their long-term goals more apparent to convince
        the bond market.
                                                                                                                                                                                                                                                 +




                                                                                             100
                                                                                                                  120
                                                                                                                                   140
                                                                                                                                                     160
                                                                                                                                                              180




              20
                           40
                                                       60
                                                                        80




       0
                           10
                                                 20
                                                                  30
                                                                                 40
                                                                                                 50
                                                                                                                  60
                                                                                                                            70
                                                                                                                                         80




                  0
     April 2006
      May 2006
     June 2006
      July 2006
   August 2006
September 2006
  October 2006
November 2006
December 2006
  January 2007
 February 2007
    March 2007
                                                                                                                                                                          2006 – March 2009



     April 2007
      May 2007
     June 2007
      July 2007
   August 2007
September 2007
  October 2007
November 2007
December 2007
  January 2008
 February 2008
    March 2008
     April 2008
      May 2008
     June 2008
      July 2008
   August 2008
September 2008
  October 2008
November 2008
December 2008
  January 2009
 February 2009
                                                                                                                                                                                                                             The Future of the PPP Market




    March 2009
                  0
                          5,000
                                                            15,000
                                                                        20,000
                                                                                        25,000
                                                                                                   30,000
                                                                                                                   35,000
                                                                                                                               40,000
                                                                                                                                         45,000




                                              10,000
                                                                                                                                                                          4. Volume and Number of Projects Financed: April




       0.00
              10,000.00
                                  20,000.00
                                                            30,000.00
                                                                                 40,000.00
                                                                                                      50,000.00
                                                                                                                            60,000.00
                                                                                                                                                  70,000.00
                                                                                                                                                              80,000.00
+
    The Future of the PPP Market
    5. Has credit dried up for PPPs?

       “By their very nature, infrastructure assets are long-term commitments whose
        intrinsic value should not be materially affected by short-term market
        movements. Cash flows and value are well-tested and, while assumptions
        about growth and expected return rates may influence value, this tends to be
        within limited boundaries. However, in some 2007 and early 2008
        transactions, unusual acquisition multiples were used to determine
        prices.” (Fitch Ratings 2009)

       Pricing competition led to infrastructure asset price inflation and increased the
        risks inherent to the financing structures used

       “The infrastructure arena, which relies on commercial bank lending as its
        primary source of financing, has suffered considerably as a result of this
        turmoil. Lending for infrastructure projects, both for new construction and for
        the recapitalisation of existing projects, has become restricted while the bond
        market – which existed in some countries for infrastructure projects – has fallen
        dormant; this is particularly true since retrenchment of monolines, the
        credit enhancement from which supported the placement of longer-dated
        bonds.” (Fitch 2009)
+
    The Future of the PPP Market
    6. The answer is not only in the debt market

       Whether or not there will be more PPPs will be decided by
        Governments

       The questions is: can markets deliver at prices (especially
        funding costs) that still represent value for money for the public
        sector?

       In the long term the answer is undeniably yes, but
             If loans prices and insurance premia are trending up this has to
              be compensated by other cost savings
             … or lower margins.
+
    The Future of the PPP Market
    7. The PPP Pipeline is full

       PPP intentions within every government in Europe

       Strong institutional support at the European level (EIB)

       Project finance delivers

       European public finance is not in a very good shape and is not about to
        get better
           Falling tax base
           Demand support policies

       The infrastructure financing gap is impressive

       But…
           Politics dictates what will happen
           If better transparency is not introduced in PPP contracts then a risk of political
            backlash against contractors exists, even in Europe
+
    Conclusions
    PPP Best Practice

       A number of empirical studies of PPPs commissioned by public
        authorities have outlined conclusions on “best practice” and
        lessons learned in PPPs.
           Defining clear objectives
           Developing a clear procurement process (vs. ad hoc ring fencing)
           Monitoring results and developing a benchmarking processes against
            the PSC
           Clearly identifying risks, benefits and pitfalls
           Developing a public-private interface including qualified project teams
            and communication channels
           Developing better knowledge of typical cost probability distributions
           Ensuring effective project management and that the deal makes sense
           Testing the market before issuing requests for proposals (RFPs)
+
    Conclusions
    The PPP Landscape…

       Except for the UK, the volume and scale of PPPs remains limited,
        sometimes marginal compared to the conventional procurement of
        public services

       The PPP market has known a constant growth over the past two
        decades and the intentions of governments are to sign more and
        more of these contracts
           There is however a discrepancy between the experience in developing
            countries where numerous terminations and problems have occurred
            and more mature markets where the PPP pipeline is full

       The financial methodology used to structure these contracts,
        project financing, has proven very robust and ensures that projects
        and services will be delivered
           However there are issues of size and high transactions costs
+
    Conclusions

       Recent developments in the financial sector attracted more and more
        buyers of infrastructure assets and a more short term view may have
        prevailed in the years leading to the credit crisis

       PPP financing is not going to get any cheaper in the short term

       But PPPs and project finance are proving more resilient than most other
        types of transactions and investments. They are a great asset class for
        investors

       Politically, PPPs are here to stay (at least in Europe where political risks
        are low)

       The challenge for the next decade of PPPs is to make them affordable in
        an environment where private finance will be more difficult and costly to
        arrange and where more accountability will be expected from project
        developers (including from capital markets)
+

    Thank you!



                 ESSEC/ KCL PPP Seminar

                 13 May 2009

				
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