1. Project Finance & PPPs A Mechanism of Optimising Private Sector Involvement in Infrastructure Investment Public-private partnership in Ukraine: opportunities and risks 27 May 2010 Peter Jeffreys

2. Characteristics of PPPs Considerable legal and structural diversity Aim to harness private skills to promote efficiency in delivery of public services Are based on procurement of services, not procurement of assets Incorporate risk sharing arrangements, underpinned by private finance Often, although not always, financed through Project Finance structures Often support very long maturity debt

3. Project Finance Project Finance is specialised form of finance based on: A stand alone project A Special Purpose Company (SPC) as the borrower High ratio of debt to equity (gearing) Lending based on project cash flows (not balance sheet) Lenders rely on project contracts, not physical assets, as project security Non recourse finance (i.e. no claim on investors) Finite project life (i.e. debt to be repaid at project close, in contrast to corporate debt which can be rolled over)

4. Risks in PPP projects Senior lenders play a key role in ensuring efficient risk allocation This is a function of: –High gearing on many projects; –Lending against cashflows not balance sheet strength Senior lenders are concerned about: –Overall risks taken on by the private sector –Allocation of these risks within the private sector consortium Importance of pass through of risks to sub contractors Risks to SPV (borrower) limited to sub contractor failures which cannot be remedied or passed on and risks shared with the public sector

5. Shareholders Equity Banks Bondholders Taxpayers Where do the risks go?

6. Conclusions 1 CONTRACTORS Take on additional risks in PPP projects Not simply fixed price, fixed time contracts Lenders look to contractors to keep SPV solvent in case of contractor default, late delivery of assets, latent defect coverage These risks need to be understood and priced Need to have financial strength to take on these contingent liabilities Need sufficient strength and depth in contractor market to replace non performing sub-contractors A) B) C)

7. Conclusions 2 LENDERS Rely on cashflows, means fully aligned interests with the public sector Key distinction between PPP and D&B contracts is that lenders take contractor insolvency risk in PPPs Must have the power to replace non performing contractors – and step into a non performing SPV Security of over project cashflows can support very long maturity lending – a key advantage for the public sector Importance to public sector of experienced lenders with long term commitment to the project B) A) C)

8. Conclusions 3 THE PUBLIC SECTOR PPP transactions complex to negotiate and new skills required by the public sector Requires commitment and investment – the right advisors are essential but not a substitute for public sector capacity building Clear political commitment to PPPs also essential to build private sector confidence This confidence essential to encourage private sector to invest in costly and complex bidding procedures A) B)