Nikos Mantzoufas - Overseas Development Institute

Infrastructure Finance

Nikos Mantzoufas

PPP Secretary, Greece


Contents

1. Key Questions

2. Lessons Learned

3. Routes to Finance Infrastructure

4. Sources of Infrastructure Finance

5. Social Infrastructure PPPs – Global

6. PPPs in Europe

7. Role of European Investment Bank & PPPs

8. Role of European Investment Bank & PPPs in Greece

9. Hellenic PPP Practice: EU Grants & PPPs: Unfolding “blending”

2

Key Question 1: What do we consider as infrastructure?

Infrastructure Finance economic infrastructure projects that generate economic growth and enable society to function.

• Transport facilities (air, sea and land)

• Utilities (water, gas , electricity)

• Flood defense

• Waste management

• ICT Networks social infrastructure assets to support the provision of public services.

• Educational Establishments

• Public Buildings

• Urban Development

• Health Facilities

3


Key Question 2: Why do we need infrastructure?

Economic

Growth

Every EUR spent on public economic infrastructure further increases GDP by 0.05-0.40

Looking Further…

Competitiveness

Social Impact

1.

Access

2.

Connection

3.

Safety

Sustainability

&

Environmental

Impact

1.

Energy Supply Mix

2.

Better Quality

Standards

3.

Safe Maintenance

(pipes, transport)

Medium to Long Term

The set of institutions, policies, and factors that determine the level of productivity of a country.

Key competitiveness index!

Quality of Infrastructure

4


Key Question 2: Why do we need infrastructure?

Global Infrastructure Gap

“The difference between infrastructure needs and infrastructure spending ”

Shortfall of

Supply and

Demand

US $ 1 TRILION or 1,25% of Global GDP

Infrastructure Spending or Supply

(amount that is being invested in infrastructure ) =

$2.7 trillion per year

Is Lower than infrastructure needs or Demand

(amount that OUGHT to be invested) = $3.7 trillion per year

$57 trillion will be needed in infrastructure investment between now and 2030 – simply to keep up with projected global GDP growth.

McKinsey Global Institute

Infrastructure investment both to maintain existing and build new, remains a challenge, for example in emerging economies 880 million people live without safe drinking water.

While global infrastructure requirements are huge, governments’ fiscal budgets are increasingly constrained.

5

Key Question 3: How to fund and finance infrastructure?


Infrastructure Funding

Infrastructure Financing

Revenue sources

1.

General Purpose tax revenues

2.

Revenues from user charges

3.

Other charges or fees dedicated to infrastructure

Revenue sources that are turned into capital TODAY to build or improve infrastructure

Only if funding infrastructure issues are addressed, financing options will expand.

Successful Infrastructure Projects have three (3) characteristics in common:

1.

Strong Underlying Business Case

2.

Support by a strong financing and contractual structure

3.

Depend on sustainable funding sources

Source: World Economic Forum - Accelerating Infrastructure Delivery –

New Evidence from International Financial Institutions

Key Constraint:

Public Budgets - the largest contributor of

infrastructure finance - have not recovered from the financial crisis worsening the gap in the market for infrastructure finance.

6


Key Question 4: Who should pay for infrastructure?

1

2

Users

Tax -Payers

User charges are typically tied directly to the cost of producing the service for which the fee is charged. This source of funding is limited to those forms of infrastructure that are amenable to the collection of user charges.

Moreover, infrastructure competes for space in household budgets.

Governments have two (2) options to pay for projects’ construction & operating costs

Own Resources

Public Private

Partnerships

Tax Receipts / Asset

Sales / Bond Launches

Project Finance

Solutions

3 Mixed user-pay & tax payer funding solution

Without predictable revenue sources the broader benefits of a project can never be realized.

7


Key Question 5: Which method of procurement should governments choose for infrastructure?

1

2

3

Traditional procurement: governments design infrastructure assets & tender out the construction works to the contractor who has the lowest price.

Design & Build contracts: require private sector contractors to tender for designing and building the infrastructure.

If the government uses traditional or design & build procurement approaches: a. it must ensure that sufficient funds are set aside for routine maintenance and, b. that the maintenance quality is monitored.

Whole life-cycle cost of assets: require either public works departments to optimize the whole life-cycle cost in the design, building and maintenance of assets OR it can invite the private sector to build & operate assets with long-term contracts.

Allows the initial investment & future maintenance cost relation or Total “Ownership” Cost - to become clearer

“Even well-designed and built infrastructure will not achieve the intended benefits unless it is maintained.” -

World Economic Forum

8


Key Question 6: Assuming the government chooses whole life-cycle cost approach what are the criteria for governments to choose the public works route?

1. Experienced in latest design techniques.

2. Can minimize total cost of ownership.

3. Able to negotiate and purchase construction materials more effectively than private companies.

4. Able to build the assets more efficiently than private competitors.

5. Able to maintain the assets to the required output/outcome-based specifications more effectively than private companies.

If most of those criteria are not met the government may want to consider a privately provided Whole Life Cycle

Cost approach.

A long term contract between a private party and a government agency, for providing a public asset or service, in which the private party bears significant risk and management responsibility.

Public Private Partnerships

Source: World Economic Forum

9


Key Question 7: What are the potential advantages of Public Private Partnerships? Or their value proposition?

Key Fact: Transactions require the devotion of multiple stakeholders with conflicting goals.

Potential Advantage Description

Improved

Project

Selection

Accelerated

Infrastructure

Provision

Whole lifecycle cost optimization

“White elephant” or Wasteful projects – economically underproductive projects - are potentially filtered out as both the government and private investors tend to conduct a very thorough due diligence process

Accelerated

Delivery

Enhanced

Delivery

Better on-time construction performance

Principle of “no service-no payment” ensures that the private sector is incentivized to deliver to time i.

Applied lifecycle approach and assured maintenance ii.

High service quality iii.

Clearly defined governance structure i.

On-going commitment to maintenance, leading to better asset condition ii.

Better defined project scope iii.

Improved output from defined service standards

• PPPs address the life-cycle dependencies between design, construction and operations effectively as they assign the full asset responsibility to a single party.

• PPPs attempt to unbundle risks & allocate to the best party able to manage them.

10


Lessons Learned

However PPP’s are not a PANACEA. What are the lessons learned from their challenges?

Success in infrastructure investment, especially for Public Private Partnerships (PPPs) (which are generally very complex legally, financially and technically), is dependent on well designed projects i.e. on effective project preparation.

High Level Panel – Recommendations to G20

Economic, Political and Execution hard-won lessons for successful

PPPs Ensure sound economic fundamentals

Support a transparent, competitive bid process

Structure partnership to optimize COST,

QUALITY,

INVESTOR

RETURN

Build

Stakeholder

Support

Secure

Political

Champions

11


Routes to Finance Infrastructure Investments

Financing perspective ?

1.

infrastructure opportunities are usually capital intensive

2.

there is a tangible asset to operate and maintain, and

3.

the asset is expected to generate cash over the long term.

4.

Both equity and debt can be used to finance infrastructure projects.

5.

While evaluating the financing of infrastructure projects, careful consideration needs to be given to risk and uncertainty.

Corporations

Public

Entities

Global Project Finance Deals for 2013: 548

Global Project Finance Volume: US $280 billion

Closed Deals – Social Infrastructure: 58, US$13 billion

Source: Infrastructure Journal

Ways of financing the build

Examples

Existing Cash resources Some large companies are able to fund investments from existing cash flows.

Corporate

Finance/Debt

Companies can utilize the funds they borrow for their company’s general operations with the debt backed by the company’s balance sheet.

Project Finance

Government Bond

Issues

Off-balance sheet: Ratio of debt to equity is higher than for many corporate loans.

Government uses bond receipts to fund the building of the assets.

Government asset sales

Government privatizes companies or sells land to finance new infrastructure.

Existing Cash Reserves Some governments running a fiscal surplus may have spare cash reserves.

12

Debt

Direct

Commercial Bank

Loans

Public Capital

Markets


Sources of Infrastructure Finance

Equity

Project developers involved in the project may be prepared to loan money to fund the project.

This is the most common source of debt.

The bond markets can be used to finance infrastructure investments. However during the current financial turbulence the bond markets for standalone projects have been negatively affected.

Direct

Institutional investments

Corporate equity is still important although much of the focus on potential sources of funding is on commercial debt and institutional equity.

Much institutional equity has been committed to or invested in infrastructure funds.

DEBT + EQUITY = CAPITAL STRUCTURE

There are two main reasons why the capital structure is important.

1. First, understanding the likely leverage will give an indication of the amount of debt and equity that may be needed to finance an infrastructure opportunity.

2. Second, knowing the likely proportion of debt to equity will help determine the cost of the transaction because equity carries more risk than debt and is also a more expensive form of finance.

What about Project Bonds?

Certain Issues need to be addressed

13



1.

The biggest lenders to infrastructure are no longer the European banks. Asian banks and Australian institutions have continued to usurp this historic paradigm.

2.

Across the medium and long term many governments would benefit from establishing and maintaining more structured and systematic processes around the tendering and management of projects.

3.

A more direct approach to infrastructure development should see the markets rise still further, whilst the creation of a greater internal capacity to lead projects in national governments will open the way for greater private investment.

14



Pre-financial crisis

European PPP market relied heavily on project finance debt provided by commercial banks and/or public institutions (e.g. EIB) financing

Post-financial crisis

Commercial bank debt ?

More difficult to secure and lending terms (e.g. pricing, tenors, loan volumes) have deteriorated.

Project Bond Financing

Project bonds are debt instruments issued by PPP project companies & bought by institutional investors.

“They can play a major role in bridging the financing gap for infrastructure investments.”

EPEC 2012

Issues to consider

Maturity/refinancing risk

Transaction size

Termination provisions

Credit quality

Pricing

Preparatory costs

15


Social Infrastructure PPPs - Global

• The sector received US$13 billion in infrastructure investment across 58 projects; out of this US$10 billion was debt.

• The social infrastructure sector was dominated by healthcare (24 per cent), education (23 per cent) and waste/recycling projects (18 per cent).

Drivers & Risks

Government spending reductions are still adversely affecting the global pipeline of social and defence projects, with various national administrations reluctant to antagonise the electorate with high capital spending programmes.

16


PPPs in Europe

• 80 PPP transactions reached financial close in 2013, significantly more than the 68 recorded for 2012.

• The average transaction size increased to reach EUR 203 million (EUR 188 million in 2012) in 2013.

• Over 90% of the transactions closed were authority-pay PPPs (e.g. availability payments). Only six projects involved user payments or the transfer of demand/traffic risk.

Source: European PPP Expertise Center

17


Role of European Investment Bank & PPPs

The EIB:

• Has long-standing experience in the analysis and successful closing of infrastructure Public Private

Partnerships (PPPs).

• Since 1990 has progressively broadened the geographic and sectorial spread of its PPP lending and is now one of the major funders of projects in Europe with a portfolio of 130 projects and investment of around EUR 30 billion.

18


Role of European Investment Bank & PPPs in Greece

EIB has financed three out of three PPP – Availability Payment transactions in Greece

European Investment Bank

EUR 9 million

April 2009

Fire Stations SPV

EUR 19,1 million

April 2014

Attica Schools 1 SPV

EUR 16,7 million

May 2014

Attica Schools 2 SPV

19


Case Study 1: Role of Multinational Development Banks

Case Study 1 – Revenue Backed Finance - the

Panama Canal

In 2008, five MDBs (European Investment Bank, the Japan Bank for International Cooperation, the

Inter-American Development Bank, the

International Finance Corporation and

Corporacion de Fomento) offered US$ 2.3 billion to finance part of the US $5.2 billion Panama

Canal Expansion.

Why approach the MDBs?

The finance was raised at the time of the Lehman

Brothers bank collapse. MDBs were selected as they were able to offer longer-term loan than commercial banks.

How will the MDB loans be repaid?

The loans are not secured against the new canal, but rely instead on being funded from future toll charges .

20

Source: Adopted from WEF Report


Case Study 2: Bridge PPP

Case Study 2 – Disraeli Bridges PPP - Canada

The Disraeli Bridges project is a 2-kilometer (1.2mile) PPP initiative consisting of two new vehicular structures and three new stretches of reconstructed roadway. The existing bridge over the Red River was retrofitted as an active transportation corridor.

Background: The bridges were originally constructed in

1959-60.

A condition assessment found numerous deficiencies that need rehabilitation or upgrade. The City of Winnepeg will make payments to Plenary (SPV) based on a lump sum payment upon commissioning that provides partial payment for capital costs, followed by regular payments over 30 years that pay for the remainder of the capital cost as well as regular maintenance costs.

Value:$154.72m USD

Equity:$14.69m USD

Debt:$140.03m USD

Debt/Equity Ratio:91:9

Finance Type: Project Finance

Concession: Design Build Finance

Maintenance Operate

Concession Period:30 years

PPP: Yes

“This active transportation bridge is all about cyclists and pedestrians’ safety and helping to reduce gas emissions by promoting active living,” declared MP

Toet, on behalf of the Minister of Infrastructure,

Communities and Intergovernmental Affairs.

Financial Close: 2010

Operation Commencement: 2013

21

Source: Adopted from Infranews


Hellenic PPP Practice: EU Grants & PPPs: Unfolding “blending”

1

2

3

4

European Union Structural Funds

European Investment Bank

JESSICA

Private Investment

•

Robust investment planning

•

Safeguarded projects from a legal, technical and financial perspective

•

Transparency in PPP finances

•

Long established institutions

•

Adaptability to market needs

Blending EU instruments with private capital addresses specific challenges. This process enables for a coherent and controlled procedure that is safeguarded from a variety of institutions.

Project

Inception

Project

Delivery

22

Variants of EU blending & PPP

1. Non- Revenue DBFO - JESSICA & EIB

2. Non-Revenue DBFO – EU Grants

3. Revenue Generating DBO - EU Grants

4. Revenue Generating DBFO - EU Grants & JESSICA

5. Revenue Generating DBFO – JESSICA & EIB



Case Study 1: Attica Schools PPP (€ 110 mil)

• The Schools Organization will award the PPP contract for the Design-Build-

Finance-Operate and Maintenance phases to the private entity through a single

DBFO contract.

Availability Payments by the State

Construction phase


EIB

JESSICA

Operational phase

Loan repayment

-Operational, maintenance etc costs

Dividends

•

EIB’s role to support the PPP drive in Member States towards the improvement of public services through increased private sector participation is highlighted in the Schools Project with a 40% loan participation.

• JESSICA Investment Board approved funding of 40% on favorable terms against commercial banks, based on the viability of the project.

23









Case Study 2: Attica Urban Transportation-Automatic Fare Collection System &

Telematics System (€ 129 mil & € 52mil)

• Both projects are through a Design-Build-Finance-Operate contract for 10 years.

• First ICT PPP projects to be implemented and at the same time the first initiative in Greece, to combine EU funds with private finance in availability-based PPP projects.

Availability Payments by the State



EU grants


Loan repayment


Dividends

•

JASPERS was a critical member in the financial and socio-economic analysis conducted by the Awarding Authority

(Organization for Athens Urban Transportation).

• European Regional Development Fund approved the funding of €30 mil.

24









Case Study 3: Broadband development in Greek rural areas (> € 200 mil)

• The Project was subject to individual notification on the compatibility of Aid.

•

Following the European Commission’s assessment of the measure, the decision (SA.32866) was issued on 10.11.2011 stating that the measure is

compatible with the internal market, pursuant to the Treaty on the Functioning of the European Union (TFEU).

Fair profit margin level


Revenues by the private investors

Private Design,

Build &

Construction VAT

EU grants


Loan repayment


Dividends

JASPERS

CLAW-BACK MECHANISM: if “profits surpass the level of a fair profit margin then a percentage of the exceeding part may remain at the contractor’s disposal, increasing its total profit levels, while the majority percentage of the exceeding part will form a special taxable reserve which can be used during the next year for specific broadband development initiatives.”

25









Case Study 4: Waste Management Projects

• Design, financing, construction, maintenance and operation of the respective waste management facilities for a period of 25 years.

Gate-Fee Revenues by the private investors



JESSICA

EU grants


Loan repayment


Dividends

Benefit from use of EU grants & potential 3 rd party revenues

Objectives for Waste Management Projects

• To reduce the usage and impact of illegal landfills

•

To complement the Region to meet EU landfill diversion targets for 2020

• To achieve a fair gate fee

•

To effectively absorb available EU funding opportunities

26









Case Study 5: Western Macedonia Waste Management Project

• Design, financing, construction, maintenance and operation of the Integrated

Waste Management System in the region of Western Macedonia for a period of 27 years.

Gate-Fee Revenues by the private investors



EIB

JESSICA


Loan repayment


Dividends

Benefit from use of EU grants & potential 3 rd party revenues

• The first waste management project is heading towards the announcement of the preferred bidder.

•

EIB’s participation approved in principle. No EU grant funding

27


Nikos Mantzoufas

PPP Secretary, Greece

Nikos Mantzoufas - Overseas Development Institute

Infrastructure Finance

Infrastructure Finance

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