Nikos Mantzoufas - Overseas Development Institute

Report
Infrastructure Finance
Nikos Mantzoufas
PPP Secretary, Greece
Infrastructure Finance
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”
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Infrastructure Finance
Key Question 1: What do we consider as infrastructure?
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
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Infrastructure Finance
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
Sustainability
&
Environmental
Impact
1. Access
2. Connection
3. Safety
The set of institutions, policies, and
factors that determine the level of
productivity of a country.
1. Energy Supply Mix
2. Better Quality
Standards
3. Safe Maintenance
(pipes, transport)
Medium to Long Term
Key competitiveness index!
Quality of Infrastructure
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Infrastructure Finance
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.
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Infrastructure Finance
Key Question 3: How to fund and finance infrastructure?
Infrastructure Funding
Revenue sources
Infrastructure Financing
Revenue sources that are turned
into capital TODAY to build or
improve infrastructure
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
1.
2.
3.
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.
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.
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Infrastructure Finance
Key Question 4: Who should pay for infrastructure?
1
2
3
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.
Governments have two (2)
options to pay for projects’
construction & operating costs
Moreover, infrastructure
competes for space in
household budgets.
Own Resources
Tax Receipts / Asset
Sales / Bond Launches
Public Private
Partnerships
Project Finance
Solutions
Mixed user-pay & tax payer funding solution
Without predictable revenue sources the broader benefits of a project can never be realized.
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Infrastructure Finance
Key Question 5: Which method of procurement should governments choose for infrastructure?
Traditional procurement:
1
2
3
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.
Whole life-cycle cost of assets:
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.
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
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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?
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.
If most of those criteria are
not met the government may
want to consider a privately
provided Whole Life Cycle
Cost approach.
5. Able to maintain the assets to the required output/outcome-based
specifications more effectively than private companies.
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
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Infrastructure Finance
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
Improved
Project
Selection
Accelerated
Infrastructure
Provision
Whole lifecycle cost
optimization
Description
“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
Better on-time
construction
performance
i.
Enhanced
Delivery
ii.
iii.
Principle of “no service-no payment” ensures that
the private sector is incentivized to deliver to time
Applied lifecycle approach
and assured maintenance
High service quality
Clearly defined
governance structure
i.
ii.
iii.
On-going commitment to maintenance,
leading to better asset condition
Better defined project scope
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.
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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
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
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Infrastructure Finance
Routes to Finance Infrastructure Investments
Ways of financing Examples
the build
Financing perspective ?
1. infrastructure opportunities
are usually capital intensive
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.
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.
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2. there is a tangible asset to
operate and maintain, and
3. the asset is expected to
generate cash over the long
term.
Corporations
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.
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
Infrastructure Finance
Sources of Infrastructure Finance
Debt
Equity
Direct
Project 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
Loans
This is the most common
source of debt.
Institutional
investments
Much 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?
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.
Certain Issues need to be
addressed
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Infrastructure Finance
Sources of Infrastructure Finance
1.
2.
3.
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.
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Infrastructure Finance
Sources of Infrastructure Finance
Pre-financial crisis
Post-financial crisis
European PPP market relied
heavily on project finance debt
provided by commercial banks
and/or
public
financing
institutions (e.g. EIB)
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
Credit quality
Transaction size
Pricing
Termination provisions
Preparatory costs
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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 & 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.
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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 Center
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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.
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Infrastructure Finance
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
EUR 19,1 million
EUR 16,7 million
April 2009
April 2014
May 2014
Fire Stations SPV
Attica Schools 1 SPV
Attica Schools 2 SPV
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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.
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.
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Source: Adopted from WEF Report
Infrastructure Finance
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
“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.
Finance Type: Project Finance
Concession: Design Build Finance
Maintenance Operate
Concession Period:30 years
PPP: Yes
Financial Close: 2010
Operation Commencement: 2013
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Source: Adopted from Infranews
Infrastructure Finance
Hellenic PPP Practice: EU Grants & PPPs: Unfolding “blending”
1
2
European Union Structural Funds
•
Robust investment planning
•
Safeguarded projects from a
legal, technical and financial
perspective
•
Transparency in PPP finances
•
Long established institutions
•
Adaptability to market needs
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
Delivery
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Infrastructure Finance
Hellenic PPP Practice: EU Grants & PPPs: Unfolding “blending”
Variants of EU blending & PPP
1. Non- Revenue DBFO - JESSICA & EIB
2. Non-Revenue DBFO – EU Grants
3. Revenue Generating DBO - EU Grants
Case Study 1: Attica Schools PPP (€ 110 mil)
• The Schools Organization will award the PPP contract for the Design-BuildFinance-Operate and Maintenance phases to the private entity through a single
DBFO contract.
4. Revenue Generating DBFO - EU Grants & JESSICA
5. Revenue Generating DBFO – JESSICA & EIB
Availability Payments
by the State
Construction phase
Private Investment
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.
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Infrastructure Finance
Hellenic PPP Practice: EU Grants & PPPs: Unfolding “blending”
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 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
Construction phase
Private Investment
Operational phase
EU grants
-Loan repayment
-Operational, maintenance etc costs
-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.
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Infrastructure Finance
Hellenic PPP Practice: EU Grants & PPPs: Unfolding “blending”
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
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).
5. Revenue Generating DBFO – JESSICA & EIB
Fair profit margin level
Construction phase
Revenues by the private
investors
Private Design,
Build &
Construction VAT
EU grants
JASPERS
Operational phase
-Loan repayment
-Operational, maintenance etc costs
-Dividends
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.”
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Infrastructure Finance
Hellenic PPP Practice: EU Grants & PPPs: Unfolding “blending”
Variants of EU blending & PPP
1. Non- Revenue DBFO - JESSICA & EIB
2. Non-Revenue DBFO – EU Grants
Case Study 4: Waste Management Projects
• Design, financing, construction, maintenance and operation of the respective
waste management facilities for a period of 25 years.
3. Revenue Generating DBO - EU Grants
4. Revenue Generating DBFO - EU Grants & JESSICA
5. Revenue Generating DBFO – JESSICA & EIB
Gate-Fee Revenues by
the private investors
Construction phase
Private Investment
JESSICA
Operational phase
EU grants
-Loan repayment
-Operational, maintenance etc costs
-Dividends
Benefit from use of EU grants & potential 3rd 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
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Infrastructure Finance
Hellenic PPP Practice: EU Grants & PPPs: Unfolding “blending”
Variants of EU blending & PPP
1. Non- Revenue DBFO - JESSICA & EIB
2. Non-Revenue DBFO – EU Grants
3. Revenue Generating DBO - EU Grants
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.
4. Revenue Generating DBFO - EU Grants & JESSICA
5. Revenue Generating DBFO – JESSICA & EIB
Gate-Fee Revenues by
the private investors
Construction phase
Private Investment
EIB
Operational phase
-Loan repayment
-Operational, maintenance etc costs
-Dividends
JESSICA
Benefit from use of EU grants & potential 3rd 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
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Infrastructure Finance
Nikos Mantzoufas
PPP Secretary, Greece

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