Infrastructure - PowerPoint Presentation

Slide1

Infrastructure

Finance

Nikos

Mantzoufas

PPP Secretary, GreeceSlide2

2

Infrastructure Finance

Contents

Key Questions

Lessons Learned

Routes to Finance Infrastructure

Sources of Infrastructure Finance

Social Infrastructure PPPs – Global

PPPs in Europe

Role of European Investment Bank & PPPs

Role of European Investment Bank & PPPs in Greece

Hellenic PPP Practice: EU Grants & PPPs: Unfolding “blending”Slide3

3

Infrastructure Finance

Transport facilities (air, sea and land)

Utilities (water, gas , electricity) Flood defense

Waste management ICT Networks

Educational Establishments

Public Buildings

Urban Development

Health Facilities

social infrastructure

assets to support the provision of public services.

economic infrastructure

projects that generate economic growth and enable society to function.

Key Question 1: What do we consider as infrastructure?Slide4

Key Question 2: Why do we need infrastructure?

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

4

Infrastructure Finance

Economic Growth

Sustainability & Environmental Impact

Medium to Long Term

Competitiveness

Looking Further…

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

Access

Connection

Safety

Social Impact

Energy Supply Mix

Better Quality Standards

Safe Maintenance (pipes, transport)

Key competitiveness index! Quality of InfrastructureSlide5

Key Question 2: Why do we need infrastructure?

5

Infrastructure Finance

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

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

$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. Slide6

6

Infrastructure Finance

Key Question 3: How to fund and finance infrastructure?

Infrastructure Funding

Infrastructure

Financing

Revenue sources

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

General Purpose tax revenues

Revenues from user charges

Other charges or fees dedicated to infrastructure

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

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

Strong Underlying Business Case

Support by a strong

financing

and contractual structure

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. Slide7

7

Infrastructure Finance

Key Question 4: Who should pay for infrastructure?

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

Users

Tax -Payers

Mixed user-pay & tax payer funding solution

Own Resources

Public Private Partnerships

1

2

3

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.

Without

predictable

revenue sources the broader benefits of a project can never be realized.

Tax Receipts / Asset Sales / Bond Launches

Project Finance SolutionsSlide8

8

Infrastructure Finance

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

Traditional procurement:

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

1

Design & Build contracts:

require private sector contractors to tender for designing and building the infrastructure.

2

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.

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

maintained.

” -

World Economic Forum

3

If the government uses traditional or design & build procurement approaches:

it must ensure that sufficient funds are set aside for routine maintenance and,

that the maintenance quality is monitored.

Allows the initial investment & future maintenance cost relation - or

Total “Ownership” Cost

- to become clearerSlide9

9

Infrastructure Finance

Key Question 6: Assuming the government chooses

whole life-cycle cost approach

what are the criteria for governments to choose the public works route?

Experienced in latest design techniques.

Can minimize total cost of ownership.

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

Able to build the assets more efficiently than private competitors.

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

Source: World Economic Forum

If most of those criteria are

not

met the government may want to consider a privately provided Whole Life Cycle Cost approach.

Public Private Partnerships

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. Slide10

10

Infrastructure Finance

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

Potential Advantage

Description

Improved

Project

Selection

“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

Better on-time construction performance

Accelerated Delivery

Enhanced Delivery

Applied lifecycle approach and assured maintenance

High service quality

Clearly defined governance structure

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

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

Better defined project scope

Improved output from defined service standards

Accelerated Infrastructure Provision

Whole life-cycle cost optimization

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.

Key Fact: Transactions require the devotion of multiple stakeholders with conflicting goals.Slide11

11

Infrastructure Finance

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 PPPsSlide12

12

Financing perspective

?

infrastructure opportunities are usually capital intensive

there is a tangible asset to operate and maintain, andthe asset is expected to generate cash over the long term. Both equity and debt can be used to finance infrastructure projects.While evaluating the financing of infrastructure projects, careful consideration needs to be given to risk and uncertainty.

Infrastructure Finance

Routes to Finance Infrastructure Investments

Ways of financing the build

Examples

Corporations

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

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

loans.

Public Entities

Government Bond Issues

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.

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 Slide13

13

Infrastructure Finance

Sources of Infrastructure Finance

Debt

EquityDirectProject developers involved in the project may be prepared to loan money to fund the project. Direct Corporate equity is still important although much of the focus on potential sources of funding is on commercial debt and institutional equity.

Commercial Bank LoansThis is the most common source of debt.

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

Public Capital Markets

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.

What about Project Bonds?

Certain Issues need to be addressed

DEBT + EQUITY = CAPITAL STRUCTURE

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

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.

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.Slide14

14

Infrastructure Finance

Sources of Infrastructure Finance

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

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. 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.Slide15

15

Infrastructure Finance

Sources of Infrastructure Finance

Issues to consider

Maturity/refinancing riskCredit qualityTransaction sizePricing Termination provisionsPreparatory costs

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

Pre-financial crisis

Commercial bank debt ?

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

Post-financial crisis

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 2012Slide16

16

Infrastructure Finance

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 & RisksGovernment 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.Slide17

17

Infrastructure Finance

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 CenterSlide18

18

Infrastructure Finance

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.Slide19

19

European Investment Bank

Infrastructure Finance

Role of European Investment Bank & PPPs in Greece

Fire Stations SPV

Attica Schools 1 SPV

Attica Schools 2 SPV

EUR 16,7 million

May 2014

EUR 19,1 million

April 2014

EUR 9 million

April 2009

EIB has financed three out of three PPP – Availability Payment transactions in GreeceSlide20

20

Infrastructure Finance

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.

Source: Adopted from WEF Report

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

.Slide21

21

Infrastructure Finance

Case Study 2: Bridge PPP

Case Study 2 – Disraeli Bridges PPP - Canada

The Disraeli Bridges project is a 2-kilometer (1.2-mile) 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.

Source: Adopted from

Infranews

Value:$154.72m USD

Equity:$14.69m USD

Debt:$140.03m USD

Debt/Equity Ratio:91:9

PlayPrevious

4/5

Next

Disraeli pedestrian bridge under construction

Close

Finance Type: Project Finance

Concession: Design Build Finance Maintenance Operate

Concession Period:30 years

PPP: Yes

Financial Close: 2010

Operation Commencement: 2013

“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.Slide22

Infrastructure Finance

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

22

Robust investment planning

Safeguarded projects from a legal, technical and financial perspective

Transparency in PPP finances

Long established institutions

Adaptability to market needs

1

European Union Structural Funds

2

European Investment Bank

3

JESSICA

4

Private Investment

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 DeliverySlide23

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

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.

The Schools Organization will award the PPP contract for the D

esign-Build-Finance-Operate

and Maintenance

phases to the private entity through a single DBFO contract

.

Operational phase

Availability Payments by the State

Construction phase

Private Investment

-

Loan repayment

-Operational, maintenance etc costs

-

Dividends

23

EIB

JESSICA

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

Infrastructure Finance

Hellenic PPP Practice: EU Grants & PPPs: Unfolding “blending”Slide24

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.

Operational phase

Availability Payments by the State

Construction phase

Private Investment

-

Loan repayment

-Operational, maintenance etc costs

-

Dividends

24

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.

EU grants

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

Infrastructure Finance

Hellenic PPP Practice: EU Grants & PPPs: Unfolding “blending”Slide25

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.”

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).

Operational phase

Revenues by the private investors

Construction phase

Private Design, Build & Construction VAT

-

Loan repayment

-Operational, maintenance etc costs

-

Dividends

25

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

EU grants

Fair profit margin level

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

JASPERS

Infrastructure Finance

Hellenic PPP Practice: EU Grants & PPPs: Unfolding “blending”Slide26

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

Operational phase

Gate-Fee

Revenues by the private investors

Construction phase

Private Investment

26

Case Study 4: Waste Management Projects

EU grants

-

Loan repayment

-Operational, maintenance etc costs

-

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

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

JESSICA

Infrastructure Finance

Hellenic PPP Practice: EU Grants & PPPs: Unfolding “blending”Slide27

Design, financing, construction, maintenance and operation of the Integrated Waste Management System in the region of Western Macedonia for a period of 27 years.

Operational phase

Gate-Fee

Revenues by the private investors

Construction phase

Private Investment

27

Case Study 5: Western Macedonia Waste Management Project

-

Loan repayment

-Operational, maintenance etc costs

-

Dividends

Benefit from use of EU grants & potential 3

rd

party revenues

EIB

JESSICA

The first waste management project is heading towards the announcement of the

preferred bidder

.

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

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

Infrastructure Finance

Hellenic PPP Practice: EU Grants & PPPs: Unfolding “blending”Slide28

Infrastructure

Finance

Nikos

Mantzoufas

PPP Secretary, Greece