2Infrastructure Finance ContentsKey QuestionsLessons LearnedRoutes to Finance InfrastructureSources of Infrastructure FinanceSocial Infrastructure PPPs – GlobalPPPs in EuropeRole of European Investment Bank & PPPsRole of European Investment Bank & PPPs in GreeceHellenic PPP Practice: EU Grants & PPPs: Unfolding “blending”
3Infrastructure Finance Key Question 1: What do we consider as infrastructure?economic infrastructureprojects that generate economic growth and enable society to function.Transport facilities (air, sea and land)Utilities (water, gas , electricity)Flood defenseWaste managementICT Networkssocial infrastructureassets to support the provision of public services.Educational EstablishmentsPublic BuildingsUrban DevelopmentHealth Facilities
4Sustainability & Environmental Impact Infrastructure FinanceKey Question 2: Why do we need infrastructure?Economic GrowthEvery EUR spent on public economic infrastructure further increases GDP byLooking Further…CompetitivenessSocial ImpactAccessConnectionSafetyThe set of institutions, policies, and factors that determine the level of productivity of a country.Sustainability & Environmental ImpactEnergy Supply MixBetter Quality StandardsSafe Maintenance (pipes, transport)Key competitiveness index! Quality of InfrastructureMedium to Long Term
5Infrastructure Finance Key Question 2: Why do we need infrastructure?Global Infrastructure Gap“The difference between infrastructure needs and infrastructure spending”Shortfall of Supply and DemandUS $ 1 TRILIONor 1,25% of Global GDPInfrastructure Spending or Supply(amount that is being invested in infrastructure ) = $2.7 trillion per yearIs Lower thaninfrastructure 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 InstituteInfrastructure 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.
6Infrastructure Funding Infrastructure Financing Infrastructure FinanceKey Question 3: How to fund and finance infrastructure?Infrastructure FundingRevenue sourcesGeneral Purpose tax revenuesRevenues from user chargesOther charges or fees dedicated to infrastructureInfrastructure FinancingRevenue sources that are turned into capital TODAY to build or improve infrastructureOnly if funding infrastructure issues are addressed, financing options will expand.Successful Infrastructure Projects have three (3) characteristics in common:Strong Underlying Business CaseSupport by a strong financing and contractual structureDepend on sustainable funding sourcesSource: World Economic Forum - Accelerating Infrastructure Delivery –New Evidence from International Financial InstitutionsKey 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.
7Infrastructure Finance Key Question 4: Who should pay for infrastructure?UsersUser 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.1Tax -PayersGovernments have two (2) options to pay for projects’ construction & operating costsOwn ResourcesTax Receipts / Asset Sales / Bond Launches2Public Private PartnershipsProject Finance SolutionsMixed user-pay & tax payer funding solution3Without predictable revenue sources the broader benefits of a project can never be realized.
8Infrastructure 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.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.1Design & Build contracts: require private sector contractors to tender for designing and building the infrastructure.2Whole 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 clearer3“Even well-designed and built infrastructure will not achieve the intended benefits unless it is maintained.” - World Economic Forum
9Public Private Partnerships Infrastructure FinanceKey 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.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 PartnershipsSource: World Economic Forum
10Infrastructure 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 AdvantageDescriptionImprovedProjectSelection“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 processAccelerated Infrastructure ProvisionAccelerated DeliveryBetter on-time construction performancePrinciple of “no service-no payment” ensures that the private sector is incentivized to deliver to timeEnhanced DeliveryApplied lifecycle approach and assured maintenanceHigh service qualityClearly defined governance structureOn-going commitment to maintenance, leading to better asset conditionBetter defined project scopeImproved output from defined service standardsWhole life-cycle cost optimizationPPPs 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.
11Economic, Political and Execution hard-won lessons for successful PPPs Infrastructure FinanceLessons LearnedHowever 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 G20Support a transparent, competitive bid processBuild Stakeholder SupportSecure Political ChampionsStructure partnership to optimize COST, QUALITY, INVESTOR RETURNEnsure sound economic fundamentalsEconomic, Political and Execution hard-won lessons for successful PPPs
12Infrastructure Finance Routes to Finance Infrastructure InvestmentsWays of financing the buildExamplesCorporationsExisting Cash resourcesSome large companies are able to fund investments from existing cash flows.Corporate Finance/DebtCompanies 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 EntitiesGovernment Bond IssuesGovernment uses bond receipts to fund the building of the assets.Government asset salesGovernment privatizes companies or sells land to finance new infrastructure.Existing Cash ReservesSome governments running a fiscal surplus may have spare cash reserves.Financing perspective ?infrastructure opportunities are usually capital intensivethere 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.Global Project Finance Deals for 2013: 548Global Project Finance Volume: US $280 billionClosed Deals – Social Infrastructure: 58, US$13 billionSource: Infrastructure Journal
13Certain Issues need to be addressed Infrastructure FinanceSources of Infrastructure FinanceDebtEquityDirectProject developers involved in the project may be prepared to loan money to fund the project.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 MarketsThe 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.DEBT + EQUITY = CAPITAL STRUCTUREThere 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.What about Project Bonds?Certain Issues need to be addressed
14Infrastructure Finance Sources of Infrastructure FinanceThe 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.
15Infrastructure Finance Sources of Infrastructure FinancePre-financial crisisPost-financial crisisProject Bond FinancingEuropean 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 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 2012Issues to considerMaturity/refinancing riskCredit qualityTransaction sizePricingTermination provisionsPreparatory costs
16Infrastructure Finance Social Infrastructure PPPs - GlobalThe sector received US$13 billion in infrastructure investment across 58 projects; out of this US$10 billion was debt.The social infrastructure sector was dominated by healthcare (24 per cent), education (23 per cent) and waste/recycling projects (18 per cent).Drivers & RisksGovernment spending reductions are still adversely affecting the global pipeline of social and defence projects, with various national administrations reluctant to antagonise the electorate with high capital spending programmes.
17Infrastructure Finance PPPs in Europe80 PPP transactions reached financial close in 2013, significantly more than the 68 recorded for 2012.The average transaction size increased to reach EUR 203 million (EUR 188 million in 2012) in 2013.Over 90% of the transactions closed were authority-pay PPPs (e.g. availability payments). Only six projects involved user payments or the transfer of demand/traffic risk.Source: European PPP Expertise Center
18Infrastructure Finance Role of European Investment Bank & PPPsThe EIB:Has long-standing experience in the analysis and successful closing of infrastructure Public Private Partnerships (PPPs).Since 1990 has progressively broadened the geographic and sectorial spread of its PPP lending and is now one of the major funders of projects in Europe with a portfolio of 130 projects and investment of around EUR 30 billion.
19European Investment Bank Infrastructure FinanceRole of European Investment Bank & PPPs in GreeceEIB has financed three out of three PPP – Availability Payment transactions in GreeceEuropean Investment BankEUR 9 millionApril 2009EUR 19,1 millionApril 2014EUR 16,7 millionMay 2014Fire Stations SPVAttica Schools 1 SPVAttica Schools 2 SPV
20Infrastructure Finance Case Study 1: Role of Multinational Development BanksCase Study 1 – Revenue Backed Finance - the Panama CanalIn 2008, five MDBs (European Investment Bank, the Japan Bank for International Cooperation, the Inter-American Development Bank, the International Finance Corporation and Corporacion de Fomento) offered US$ 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.Source: Adopted from WEF Report
21Infrastructure Finance Case Study 2: Bridge PPPCase Study 2 – Disraeli Bridges PPP - CanadaThe 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.PlayPrevious4/5NextDisraeli pedestrian bridge under constructionCloseBackground: 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.“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.Value:$154.72m USDEquity:$14.69m USDDebt:$140.03m USDDebt/Equity Ratio:91:9Finance Type: Project FinanceConcession: Design Build Finance Maintenance OperateConcession Period:30 yearsPPP: YesFinancial Close: 2010Operation Commencement: 2013Source: Adopted from Infranews
22Infrastructure Finance Hellenic PPP Practice: EU Grants & PPPs: Unfolding “blending”1European Union Structural FundsRobust investment planningSafeguarded projects from a legal, technical and financial perspectiveTransparency in PPP financesLong established institutionsAdaptability to market needs2European Investment Bank3JESSICA4Private InvestmentBlending 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 InceptionProject Delivery22
23Variants of EU blending & PPP Infrastructure FinanceHellenic PPP Practice: EU Grants & PPPs: Unfolding “blending”Variants of EU blending & PPP1. Non- Revenue DBFO - JESSICA & EIB2. Non-Revenue DBFO – EU Grants3. Revenue Generating DBO - EU Grants4. Revenue Generating DBFO - EU Grants & JESSICA5. Revenue Generating DBFO – JESSICA & EIBCase 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.Operational phaseAvailability Payments by the StateConstruction phasePrivate Investment-Loan repayment-Operational, maintenance etc costs-DividendsEIBJESSICAEIB’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
24Variants of EU blending & PPP Infrastructure FinanceHellenic PPP Practice: EU Grants & PPPs: Unfolding “blending”Variants of EU blending & PPP1. Non- Revenue DBFO - JESSICA & EIB2. Non-Revenue DBFO – EU Grants3. Revenue Generating DBO - EU Grants4. Revenue Generating DBFO - EU Grants & JESSICA5. Revenue Generating DBFO – JESSICA & EIBCase 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.Operational phaseAvailability Payments by the StateConstruction phasePrivate Investment-Loan repayment-Operational, maintenance etc costs-DividendsEU grantsJASPERS 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
25Variants of EU blending & PPP Infrastructure FinanceHellenic PPP Practice: EU Grants & PPPs: Unfolding “blending”Variants of EU blending & PPP1. Non- Revenue DBFO - JESSICA & EIB2. Non-Revenue DBFO – EU Grants3. Revenue Generating DBO - EU Grants4. Revenue Generating DBFO - EU Grants & JESSICA5. Revenue Generating DBFO – JESSICA & EIBCase 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 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 levelConstruction phaseRevenues by the private investorsPrivate Design, Build & Construction VAT-Loan repayment-Operational, maintenance etc costs-DividendsOperational phaseEU grantsCLAW-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.”JASPERS25
26Variants of EU blending & PPP Infrastructure FinanceHellenic PPP Practice: EU Grants & PPPs: Unfolding “blending”Variants of EU blending & PPP1. Non- Revenue DBFO - JESSICA & EIB2. Non-Revenue DBFO – EU Grants3. Revenue Generating DBO - EU Grants4. Revenue Generating DBFO - EU Grants & JESSICA5. Revenue Generating DBFO – JESSICA & EIBCase Study 4: Waste Management ProjectsDesign, financing, construction, maintenance and operation of the respective waste management facilities for a period of 25 years.Gate-Fee Revenues by the private investorsConstruction phasePrivate Investment-Loan repayment-Operational, maintenance etc costs-DividendsBenefit from use of EU grants & potential 3rd party revenuesJESSICAOperational phaseEU grantsObjectives for Waste Management ProjectsTo reduce the usage and impact of illegal landfillsTo complement the Region to meet EU landfill diversion targets for 2020To achieve a fair gate feeTo effectively absorb available EU funding opportunities26
27Variants of EU blending & PPP Infrastructure FinanceHellenic PPP Practice: EU Grants & PPPs: Unfolding “blending”Variants of EU blending & PPP1. Non- Revenue DBFO - JESSICA & EIB2. Non-Revenue DBFO – EU Grants3. Revenue Generating DBO - EU Grants4. Revenue Generating DBFO - EU Grants & JESSICA5. Revenue Generating DBFO – JESSICA & EIBCase Study 5: Western Macedonia Waste Management ProjectDesign, 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 investorsConstruction phasePrivate Investment-Loan repayment-Operational, maintenance etc costs-DividendsBenefit from use of EU grants & potential 3rd party revenuesEIBOperational phaseJESSICAThe first waste management project is heading towards the announcement of the preferred bidder.EIB’s participation approved in principle. No EU grant funding27