2 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”
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?
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 Access 2.Connection 3.Safety Social Impact 1.Energy Supply Mix 2.Better Quality Standards 3.Safe Maintenance (pipes, transport) Key competitiveness index! Quality of Infrastructure
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.
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 1.General Purpose tax revenues 2.Revenues from user charges 3.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: 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.
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 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 Solutions
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: a.it must ensure that sufficient funds are set aside for routine maintenance and, b.that the maintenance quality is monitored. Allows the initial investment & future maintenance cost relation - or Total “Ownership” Cost - to become clearer
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? 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. 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.
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 i.Applied lifecycle approach and assured maintenance ii.High service quality iii.Clearly defined governance structure Principle of “no service-no payment” ensures that the private sector is incentivized to deliver to time i.On-going commitment to maintenance, leading to better asset condition ii.Better defined project scope iii.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.
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 Support a transparent, competitive bid process Build Stakeholder Support Secure Political Champions Structure partnership to optimize COST, QUALITY, INVESTOR RETURN Ensure sound economic fundamentals Economic, Political and Execution hard-won lessons for successful PPPs
12 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. Infrastructure Finance Routes to Finance Infrastructure Investments Ways of financing the build Examples Corporations Existing Cash resourcesSome 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 FinanceOff-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 ReservesSome 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
13 Infrastructure Finance Sources of Infrastructure Finance DebtEquity DirectProject developers involved in the project may be prepared to loan money to fund the project. DirectCorporate 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? Certain Issues need to be addressed 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.
14 Infrastructure Finance Sources of Infrastructure Finance 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.
15 Infrastructure Finance Sources of Infrastructure Finance Issues to consider Maturity/refinancing riskCredit quality Transaction 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 2012
16 Infrastructure Finance Social Infrastructure PPPs - Global The sector received US$13 billion in infrastructure investment across 58 projects; out of this US$10 billion was debt. The social infrastructure sector was dominated by healthcare (24 per cent), education (23 per cent) and waste/recycling projects (18 per cent). Drivers & Risks Government spending reductions are still adversely affecting the global pipeline of social and defence projects, with various national administrations reluctant to antagonise the electorate with high capital spending programmes.
17 Infrastructure Finance PPPs in Europe 80 PPP transactions reached financial close in 2013, significantly more than the 68 recorded for The average transaction size increased to reach EUR 203 million (EUR 188 million in 2012) in Over 90% of the transactions closed were authority-pay PPPs (e.g. availability payments). Only six projects involved user payments or the transfer of demand/traffic risk. Source: European PPP Expertise Center
18 Infrastructure Finance Role of European Investment Bank & PPPs The EIB: Has long-standing experience in the analysis and successful closing of infrastructure Public Private Partnerships (PPPs). Since 1990 has progressively broadened the geographic and sectorial spread of its PPP lending and is now one of the major funders of projects in Europe with a portfolio of 130 projects and investment of around EUR 30 billion.
19 European Investment Bank Infrastructure Finance Role of European Investment Bank & PPPs in Greece Fire Stations SPVAttica Schools 1 SPV Attica Schools 2 SPV EUR 16,7 million May 2014 EUR 19,1 million April 2014 EUR 9 million April 2009 EIB has financed three out of three PPP – Availability Payment transactions in Greece
20 Infrastructure Finance Case Study 1: Role of Multinational Development Banks Case Study 1 – Revenue Backed Finance - the Panama Canal In 2008, five MDBs (European Investment Bank, the Japan Bank for International Cooperation, the Inter-American Development Bank, the International Finance Corporation and Corporacion de Fomento) offered US$ 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.
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 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.
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 Delivery
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 Design-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”
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”
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 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”
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”
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”