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HIGHWAY PPP’S, WHY AND HOW Enrique Fuentes, Development Director Ferrovial and Member of the Board of European International Contractors Seminar on.

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Presentation on theme: "HIGHWAY PPP’S, WHY AND HOW Enrique Fuentes, Development Director Ferrovial and Member of the Board of European International Contractors Seminar on."— Presentation transcript:

1 HIGHWAY PPP’S, WHY AND HOW Enrique Fuentes, Development Director Ferrovial and Member of the Board of European International Contractors Seminar on legal, economic & implementation issues on PPP’s Ministry of Economy, Poland, and World Bank Warsaw, April 2007

2 About EIC – PPP experience
European international contractors take a leading role in developing the world’s TRANSPORT infrastructure, such as toll roads, tunnels, railroads, ports and airports. The 15 of the Top 35 Transportation Developers 2006, which are associated to EIC, have implemented 269 PPP projects since the year 1985, whilst in 2006 they had 228 projects under active proposal. Warsaw, 18 June 2008 2 2

3 About EIC: Statistics With an aggregated international turnover in 2006 of almost 112 billion €, European international contractors are the most important players in the international construction business. 3 3

4 WHO WE ARE: FERROVIAL MKT Cap US$ 8 bn Heathrow Gatwick
100% 62% Heathrow Gatwick Stansted Glasgow Edimburgh Southampton Others MKT Cap US$ 7 bn Poland (59%) Texas Spain London underground World largest handling

5 WHO WE ARE: CINTRA 7 Bn€ market cap 65% of the value in North America
22(*) concessions More than 2,500(*) Km of toll roads 65% of the value in North America Present in 7(*) countries 73(**) years average concession life Canada 407 ETR Ireland Eurolink Motorway M-3 USA Chicago Skyway Indiana Toll Road Segments 5&6 SH130 Spain Ausol I M-203 R-4 M45 Ocaña-La Roda Autema Ausol II Chile Collipulli – Temuco Santiago – Talca Temuco – Rio Bueno Talca – Chillan Autopista del Bosque Portugal E. Algarve Norte Litoral Scut Açores (*) Greece Ionian Roads Central Greece ( *) Including the Scut Açores stake via Ferrovial Infraestructuras. There are also three projects pending final award: Mantua-Cremona (Italy), Central Greece (Greece) and SH-121 (USA) (**) Based on internal valuation released to the market in December 2006 (***) Projects pending final award.

6 PPP FORMULAS: RISK TRANSFER
Risks transferred to concessionaire under different PPP formulas After Eurostat ruling 11/2004, all of them are “off balance sheet” for Governments … but key criteria should be who pays for the infrastructure Formula Demand risk O&M risk Construction Land Acquisition Financing Classic Concession User paid toll Yes mitigation possible if risk too high (ie: new mkts or no toll culture) Depends on country. Normally no except Spain and, partially, Portugal mitigation in emerging markets) Shadow tolls Partial Availability schemes No Affects not only costs but revenues

7 WHY PPP’S: SERVICE (CUSTOMER RATHER THAN USER)
Incentives in a PPP are fully focused on providing a public service in the most possible efficient way, especially if traffic risk (and upside) is transferred Toronto’s 407: Better and proactive winter maintenance in Toronto’s 407 increases capture rate in bad weather periods Capacity is increased well ahead of contract obligations in Toronto’s 407, improving driving conditions and attracting more customers Chicago Skyway: Electronic tolling implemented in six months (after 30 years of city ownerhip) Queues reduced from hours to minutes Madrid – Levante Highway (Spain) incentives: 4 year extension in the original concession term depending of its performance in certain criteria: capture rate of heavy traffic, accident rate, congestion levels, and traffic flow, queues at toll plazas, pavement surface conditions Awarding criteria linked to discounts offered to customers … BUT THIS ONLY WORKS IF THE PRIVATE DEVELOPER HAS MONEY INVESTED AND RISK AND UPSIDE TRANSFERRED

8 WHY PPP’S: EFFICIENCY & INNOVATION
Deliver the most efficient infrastructure that serves public needs Construction focus on value engineering and early delivery Stop to cost and delay overruns Focus on Life Cycle costs, rather than initial construction costs Optimisation of opex / capex balance Management of ongoing capex Development of new technologies for better service / enhanced revenue Free-flow tolling Congestion / accident detection systems Toll plaza queues: Toll Flow technology Automatic anti - icing

9 WHY PPP’S: DELIVERABILITY
Boosting economic development, relieving congestion, and reducing greenhouse emissions Spanish highways in the 60’s and 70’s Chilean highways in the 90’s Portuguese highways Irish highway programme De- bottlenecking the system and providing mobility in congested areas 407ETR highway in Toronto was developed 20 years ahead of the expected horizon for public funding development thanks to the involvement of private developers Providing crucial future infrastructure for the long term development Trans Texas Corridor

10 WHY PPP’S: RATIONALITY OF DECISION MAKING AND RESOURCE ALLOCATION
Private involvement in the development of transport infrastructure brings discipline and rationality to the political decision process PPP projects solving actual, critical traffic problems are the most financially feasible Private funding used in projects capable of generating predictable revenue government funding focused on pure development projects Natural tendency to invest where investment is more needed Contract with a 3rd party allows to avoid political review of tariff setting Where Government retains control of tariffs, they seldom end up reflecting real cost of service: US turnpikes Ensures accountable development of infrastructure, not subject to budgetary constraints Ongoing maintenance and future capex

11 WHY PPP’S: COMPARISON WITH TELECOMS

12 PPP FORMULAS: BIDDING SCHEMES
High Average Objectiveness of awarding criteria €1m to €3m Reduced € thousands € millions Bidding costs 4 to 6 months 6 to 8 months 2 to 4 years Bid process length Some Inexistent Extensive Room for negotiation of contract framework Recommended Not required Mandatory Requirement of secured financing Yes Standard UK approach No Interim delivery of engineering work North American auction Express tender Spain, Chile

13 PPP FORMULAS: WHERE Risk transfer Germany USA Ireland Canada
(privatizations) France Classic concession Greece Italy Spain (ENA) GBR (new?) Spain (Central Govt) Portugal Spain (O&M) Shadow tolls Finland Spain (Regions) GBR Holland Availability schemes Canada (Quebec) Bidding scheme PFI Auction Tender

14 PPP FORMULAS: CONCLUSIONS
Governments with more PPP experience moving towards user paid schemes + demand risk transfer and towards simpler bidding schemes Governments with less experience moving the opposite way: availability and PFI bidding schemes Drivers: Risk & cost reduction as long as it is “off balance sheet” Ensure acceptability of the contractual framework Beware: experience and government structure are key for the dialogue process being efficient and objective (not every Government or legal system is like the UK) A balance should exist between the formulas The key should be Risk transfer: efficiency brought in by the Private sector rather than Government budget constraints Bidding scheme: if there is no track record, efficiency (cost) and comparability of the offers, rather than extensive negotiation …. BUT, WHATEVER YOU DO, DO IT NOW!, INFRASTRUCTURE IS NEEDED

15 PPP FORMULAS: LIKELY EVOLUTION
Short / Medium term Surge of PFI schemes for “off balance sheet” reasons Minimum risk transfer & minimum cost Limitation of concessionaire upside Initially developed by contractors, later sale to financial investors PFI main limitation: government future payment commitments Budgetary constraint: today is accounting, tomorrow will be financial Key risk transfer trade off in the long term: efficiency vs cost Long Term Classic user paid concessions for low – medium risk projects Funds raised or saved are then devoted to higher risk projects Possible transformation of PFI’s in user paid schemes Driver for PFI’s: efficiency of private sector Likely bias towards projects with a significant recurrent cost component

16 HOW TO ATTRACT INVESTORS: BALANCED DEAL?
How can an Administration attract investors? Long term deal … goes through different legislation sessions, politicians, economical and social environments, economic cycles. All equity and debt are invested upfront and are unmovable. Assets belong to the State. Private sector is left there to rely on a piece of paper … relies on its enforceability. Private sector control on the investment is very limited. Service can not be interrupted, toll setting mechanism is stipulated, most service levels are fixed. Penalty for default is normally the loss of the investment for the shareholders and all or most of the debt for the lenders. Odds are that future legislators will support the Admin side rather than the private views. Can an Administration behave and promise to behave as an equal partner in a (very) long term Agreement?

17 HOW TO ATTRACT INVESTORS: ADEQUATE & STABLE LEGISLATION
Adequate legislation: not only for the concession in itself, but also for ancillary (but key) agreements Financing: no limits to foreign lending or to step in rights for lenders Land acquisition: has to be predictable in cost & time + adequate title to land Ownership of the asset / contract: no limits to nationality or nature Types of legislative changes with effects that should be protected or compensated discriminatory legislation Tax legislation that alters the financial balance legislation that affects an essential right in the Agreement Compensation should be calculated based on effective damage (loss of future value) Compensation based on forecasts Present value Possibility: Independent calculation

18 HOW TO ATTRACT INVESTORS: COMPETING INFRASTRUCTURE
Admin should be able to implement virtually anything … but must compensate for certain damages Fair and balanced provisions relating to competing facilities: the private sector assumes a reasonable and defined amount of risk, but it is not unfairly burdened by an unanticipated source of competition Examples of competing facilities that would not generate compensation: Those specifically planned in the concession date Improvements in nearby facilities due to reaching certain congestion levels New or improved facilities that do not cause material negative impact to Developer

19 HOW TO ATRACT INVESTORS: ROAD STANDARDS
Safety and design Specify clear design rules and standards … and let private sector to optimize Developer must adhere to future safety specs … but in a fair and non discriminatory manner Substantial changes that affect the nature of the asset should be negotiated Policing and rules … as in any other similar road. Signs, lights, speed, Traffic Code Patrolling, fines, surveillance Traffic Management

20 HOW TO ATTRACT INVESTORS: ELECTRONIC TOLLS
Need for State authority to define and enforce interoperability rules For State Agencies and Private Operators Recognize different agents: issuers and operators Technical standards for transponder issuers Technical standards for road operators Basic interoperability rules (interfaces, transponder lists …) Enforceability and costs It is invented … but seldom applied

21 HOW TO ATTRACT INVESTORS: ENFORCEABILITY
Of the Agreement: Are both parties subject to the Law and the Courts? (Sovereign Immunity?) Appropriations to pay compensations Independent dispute resolution method + third party valuation Recourse to Justice by any party Effectiveness of decision Independent justice system (local or foreign) Of the tolls: Legal standing of the Concessionaire Access to data (plate owner, address …) Enforceability within state or region

22 HOW TO ATTRACT INVESTORS: TOLL RATES
Method to be established at time of agreement Negotiated approach works were concessionaire is public or semi public (France, Italy), or were there is a long track record (UK) Objective method … must not be subject to legislative or administrative decisions May consider CPI or per capita GDP to keep up with long term cost of goods Can be related to congestion levels Many possible parameters can help achieve transportation objectives: Peak hour tolls, night time rates, congestion tolls Truck / car differentials Premiums / deterrents to specific customers: high occupancy, extra heavy, local residents (but beware of fraud!) If tolls want to be kept low, it can be specified in the agreement upfront

23 HOW TO ATTRACT INVESTORS: TERMINATION
Termination for Default: Administration Default: must compensate the investors, ensure payments, get control when paid. Developers’ Default: first right of lenders to cure, then step-in of Administration. Termination for convenience (of the Admin): Investors should be compensated as per Termination for Administration’s Default Formula to calculate compensation must be fixed in Contract. Should compensate for loss of value. Third party valuation under fixed set of rules Beware of situations where it limits upside without covering downside

24 HOW TO ATTRACT INVESTORS: DO’S AND DON’T’S
Main decisions taken and in force by the time of the tender and politically supported Be aware of political timing: concessions and even tenders can outdate election periods Be aware of hurdles in your legislation … is it ready for the deal? If not, implement the necessary changes beforehand Understand cost for the taxpayer of each condition you feel you have to ask for Be as flexible as your environment allows to hear proposed “improvements” from prospective bidders Avoid subjective decisions … will scare competition and certainly devaluate the deal In lack of proven track record, extra care on legislative / enforcement framework Get ready ahead of time and have a dedicated team Feasible projects take time to develop before they can be tendered

25 EIC White Book on BOT/PPP: Recommendations
1 GENERAL PRECONDITIONS Ensure true Government Support Create a PPP Task Force Enhance Country Legal Framework (Accounting, Taxes, Procurement) 2 PROJECT PREPARATION Put in place sound procurement strategy Present comprehensive, reliable project documentation Provide for a steady and secure payment mechanism Agree on affordable level of tariffs 3 TENDER PROCESS Use Pre-qualification of bidders Ensure Transparency & Confidentiality throughout process Present clear award criteria Reimburse Bidding Costs Unsolicited Bids ??? (outside EU ) 4 RISK MITIGATION Provide for optimal risk identification & allocation Invite financial risk mitigation through IFIs, ECAs, etc. 25 25


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