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					      THE ENLARGED MEETING OF THE INVESTMENT COUNCIL
BY THE MINISTRY OF TRANSPORT AND COMMUNICATIONS OF UKRAINE




  TRANSPORT & PPP

          Steve Johnson, CEO
        BPA International Limited
                   2nd February 2006, Kiev
              THE ENLARGED MEETING OF THE INVESTMENT COUNCIL
        BY THE MINISTRY OF TRANSPORT AND COMMUNICATIONS OF UKRAINE


BPA INTERNATIONAL LIMITED



 • BPA International is a merchant banking firm which provides financial advisory and trade
   services in emerging market and transition countries worldwide



 • BPA International is especially focused on infrastructure and is an active participant in the
   development of Public Private Partnership structures



 • BPA International has been working with Ukravtodor since April 2005 on PPP and is an
   active participant in the Cabinet of Minister’s Working Group which is drafting Legislation for
   the purpose of Regulation of the Highway Network on a PPP basis



 • Web-Site: www.bpa-intl.com
               THE ENLARGED MEETING OF THE INVESTMENT COUNCIL
         BY THE MINISTRY OF TRANSPORT AND COMMUNICATIONS OF UKRAINE


THE GLOBAL INFRASTRUCTURE CHALLENGE


• The world is undergoing a period of massive demand for infrastructure spending


• There is an urgent need to build, update or rebuild the housing stock, power systems,
  telecommunications, railways, energy systems, roads, airports, ports, etc


• Privatisation provided a quick-fix solution to many essential public utility spending needs
                               (with new private owners committing to invest in required infrastructure spend)


• Governments are now looking closely at the optimal methods to finance other essential
  infrastructure projects because of rules on State-Aid, strictures of the IMF, country rating and
  other important constraints on the level of Sovereign and Municipality debt
                THE ENLARGED MEETING OF THE INVESTMENT COUNCIL
          BY THE MINISTRY OF TRANSPORT AND COMMUNICATIONS OF UKRAINE


PUBLIC INFRASTRUCTURE FINANCE

• In general we are seeing Public Infrastructure Finance being sourced in three ways:

     Sovereign & Municipality debt &/or guarantees are being allocated to projects which cannot be financed on
     a normal commercial basis

       often dedicated to cheap long term funding sources to multilaterals (World Bank, EBRD, EIB, ADB, etc) or to relevant aid
       agencies, often mixing multilateral and commercial finance to obtain beneficial long term rates below those offered by
       commercial markets alone

     When commercial debt can be raised by a wholly owned / controlled State-owned entity against its own
     name, as a "quasi-Sovereign" risk through the commercial markets

       where possible these Sovereign-guarantees are being refinanced on a commercial basis

       during 2005 BPA International successfully helped Slovak State-owned power utility Slovenske elektrarne, a.s. refinance
       € 500 million of State-guaranteed debt thereby releasing these guarantees back to the State budget

     Public Private Partnership (“PPP”) transactions
               THE ENLARGED MEETING OF THE INVESTMENT COUNCIL
         BY THE MINISTRY OF TRANSPORT AND COMMUNICATIONS OF UKRAINE

PUBLIC PRIVATE PARTNERSHIPS

• PPP is widely used globally – in very common use throughout the European Union

• PPP industry leader – the UK – has closed over US$ 76 billion of PPP projects

    About 50% of the total spend has been in the Transport Sector (45 projects)

• Used in any situation where the State & Private Companies can form a basis of co-operation

    PPP is very flexible – can be applied to projects as diverse as Prisons to Low Cost Housing

       the first PPP project – Fazakerley Prison Services (1994-1995)

       this STG£ 95.5 million PPP DBOF project for a private UK prison was the first “Private Finance Initiative” project, and
       established the framework for all subsequent PFI/PPP projects globally

    PPP fits especially well to infrastructure projects – highways, tunnels & bridges
       projects initiated throughout Central Europe - Poland, Hungary, Slovakia, Bulgaria, Romania, Croatia, Czech Republic

       normally structured as Design, Build, Operate and Finance (“DBOF”) projects
               THE ENLARGED MEETING OF THE INVESTMENT COUNCIL
         BY THE MINISTRY OF TRANSPORT AND COMMUNICATIONS OF UKRAINE


ADVANTAGES OF PPP


• PPP schemes offer any Government or Municipality the following critical advantages:

    Highly reputable and expert 3rd parties are contracted-in through this process

       to deliver a higher quality of service than the State or Municipalities normally hopes to achieve

       through an open and transparent processes

       these 3rd parties have to deliver the required services


    The 3rd parties are normally required to arrange and manage the appropriate financing

       this has to be professionally done, if not, the project will not proceed

    The scarce State or Municipal Guarantees can be allocated to other projects optimising budgets
               THE ENLARGED MEETING OF THE INVESTMENT COUNCIL
         BY THE MINISTRY OF TRANSPORT AND COMMUNICATIONS OF UKRAINE



PPP KEY DRIVERS


• The key PPP drivers – which are especially pertinent in emerging markets:

       Government wants to minimise obligations, lock-in high quality service and ensure off-balance sheet
       treatment, whilst maintaining an ability to drive future cost savings from any positive market movements

       SPVs and Service Providers want to ensure that they enter into contracts playing to their individual core
       competencies, which offer a reasonable profit potential, and without raising undue contingent liabilities
       which they cannot control

       Global Debt Capital Markets want simple, manageable risk proposals and solutions where each risk is
       clearly identified, properly allocated and mitigated

  • Often these key objectives are confused with the pure “financing cost”, without a full
                      THE ENLARGED MEETING OF THE INVESTMENT COUNCIL
                BY THE MINISTRY OF TRANSPORT AND COMMUNICATIONS OF UKRAINE


PPP DBOF “AVAILABILITY PAYMENT” PROJECT MODEL

                                                                    Shareholders Agreements
                                    Construction Companies                                               Other Participants
                                                                                                   (financial investors, State, etc)




                                 Lawyers                                                                                         Banks
                                                       Specialist
                                Accountants             Advice                                Capital Markets
                             Financial Advisors                                               Bond & Loans                Arrangers of Finance
                                                                                                                                Law Firm
                             Ratings Agencies
                                                                                                                          Independent Engineer
                                                                                                                          Insurance Consultant
 Design Build Operate Contract                                       Special Purpose
/ Secondary Developments Contract
                                                                     Vehicle Company
                                                                                                                                State Entity
                                                                                                PPP Contract
                                Local & Foreign
                                Sub-Contractors




Luckily, there has been a wealth of practical experience developed in PPP over the last 20 years !
                THE ENLARGED MEETING OF THE INVESTMENT COUNCIL
          BY THE MINISTRY OF TRANSPORT AND COMMUNICATIONS OF UKRAINE



ADVANTAGES OF THE PPP DBOF MODEL FOR HIGHWAYS

• Conformity to current market practices

• Correct risk allocation amongst all parties

     Each party in the project structure contributes what it does best

• Completion of the project to world class standards

     The private sector specialists take the risk that the road is completed to the best specification

• Value for money in terms of both the quality of construction and on-going service

     The private sector specialists are obliged to build and maintain the road to these high standards

• Provision of a long term off-balance sheet financing source

     If the performance risk is assumed by Private Sector - financing is marked off-balance sheet
                 THE ENLARGED MEETING OF THE INVESTMENT COUNCIL
           BY THE MINISTRY OF TRANSPORT AND COMMUNICATIONS OF UKRAINE



DECISION OF EUROSTAT ON DEFICIT & DEBT 11 FEB 2004

TREATMENT OF PUBLIC-PRIVATE PARTNERSHIPS
“…Eurostat recommends that the assets involved in a public-private partnership should be classified as non-
government assets, and therefore recorded off balance sheet for government, if both of the following conditions
are met:

      1.   the private partner bears the construction risk, and

      2.   the private partner bears at least one of either availability or demand risk.

If the construction risk is borne by government, or if the private partner bears only the construction risk and no
other risks, the assets are classified as government assets.

This has important consequences for government finances, both for the deficit and the debt.

The initial capital expenditure relating to the assets will be recorded as government fixed capital formation, with a
negative impact on government deficit/surplus. As a counterpart of this government expenditure, government
debt will increase in the form of an “imputed loan” from the partner, which is part of the “Maastricht debt”
concept. The regular payments made by government to the partner will have an impact on government
deficit/surplus only for the part relating to purchases of services and “imputed interest”…”
                                                                                                        STAT/04/18
               THE ENLARGED MEETING OF THE INVESTMENT COUNCIL
         BY THE MINISTRY OF TRANSPORT AND COMMUNICATIONS OF UKRAINE



OPTIMAL PPP DBOF MODEL

• There are three broad types of PPP DBOF Model for roads

     REAL TOLL

       When the road is constructed by the Project Company and directly paid for by the users of the road

     SHADOW TOLL

       The Government pays the Project Company fees based on the levels of traffic

     AVAILABILITY PAYMENT

       Where the Government pay the Project Company a “rental” based on the costs

• The suitability of each model typically depends on country-by-country specifics

• This is ultimately driven by the availability of finance from the Global Debt Capital Markets
                THE ENLARGED MEETING OF THE INVESTMENT COUNCIL
          BY THE MINISTRY OF TRANSPORT AND COMMUNICATIONS OF UKRAINE



UKRAINE’S TRANSPORT PPPs


• Significant transport projects need funding in Ukraine – roads, railways, ports, airports


• More than € 9 billion of highway projects have already been identified by Ukravtodor

     Kiev-Odessa / Chop are being financed by State Guarantees

     A limited pool of direct finance is available for the remaining Projects


• Two Pilot Real Toll Concessions were signed but have failed to progress to financing

     Lviv-Krakovets Concession (December 1999)

     Lviv-Brody Concession (December 2002)
                 THE ENLARGED MEETING OF THE INVESTMENT COUNCIL
           BY THE MINISTRY OF TRANSPORT AND COMMUNICATIONS OF UKRAINE

PPP DBOF AVAILABILITY PAYMENT MODEL

• Now the model of choice - especially in newly emerged and emerging markets

• Achieves the optimum flexibility and pricing for PPP projects

     Between 1990 - 2001 16% real toll road projects cancelled - over-optimistic forecasts

• Hungary, Poland and the United Kingdom had problems with Real Toll structures and minimum
  revenue/traffic guarantees

     UK Public Accounts Committee: “Departments should consider carefully the implications of basing payments to
     operators on volumes of activity over which neither the public sector nor the operators have any effective control. In the case
     of these four contracts, payments to operators are based primarily on traffic volumes which are, however, notoriously difficult
     to forecast. In other words, the Agency have created a risk which is borne by the operators and which can be expected to
     have increased their costs. PFI can deliver better value than traditional methods of procurement if risks are transferred to the
     parties best able to handle them. But it is a mistake to confuse risk transfer with risk creation, which is simply likely to
     increase costs to the tax-payer.”

• UK no longer uses shadow tolls as the payment mechanism, but rather pays according to lane
  availability and active congestion/safety management
                THE ENLARGED MEETING OF THE INVESTMENT COUNCIL
          BY THE MINISTRY OF TRANSPORT AND COMMUNICATIONS OF UKRAINE



HOW DOES THE STRUCTURE WORK ?

• Highly transparent structure

     The SPV borrows money from the debt capital markets to build the road

     The State pays a semi-annual “rental” payment to the SPV for the public to be able to use the road

     Simple structure - like renting a flat or house from a landlord


• Rentals are designed to cover the project costs and return a normal profit

     Rentals can be financed by the State in a variety of ways, including Vignettes


• The State manages its finances on a book basis – it can do the same with these PPP projects


• The State actively co-operates in the Projects – to achieve real savings
                THE ENLARGED MEETING OF THE INVESTMENT COUNCIL
          BY THE MINISTRY OF TRANSPORT AND COMMUNICATIONS OF UKRAINE



APPLYING THE PPP DBOF AVAILABILITY MODEL IN UKRAINE

• PPP Models are collaborative structures

     People working together to develop practical solutions


• The PPP DBOF Availability Payment Model was determined to offer significant benefit

     Banks and financial investors have been unwilling to accept real “traffic risk”


• A Pilot Project has been identified


• Legal changes are progressing with the help of the EBRD


• Repeatable structure – once established the final structure can easily be repeated

				
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