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Presentation on theme: "1 1 1 FINANCING OF TRANSPORT INFRASTRUCTURE POST CREDIT CRISIS: VIEW OF A PRIVATE DEVELOPER Enrique Fuentes, Development Director Ferrovial Chairman PPP."— Presentation transcript:

1 1 1 1 FINANCING OF TRANSPORT INFRASTRUCTURE POST CREDIT CRISIS: VIEW OF A PRIVATE DEVELOPER Enrique Fuentes, Development Director Ferrovial Chairman PPP Workgroup European International Contractors Private Sector Forum on the Credit Crisis European Comission & EPEC Brussels, October 2009

2 2 2 2 SUPPLY SIDE: ADVANTAGES OF PPPs Private involvement brings discipline and rationality to the decision process –PPP projects solving actual capacity / demand 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 Deliverability & accountability: Ensures development, upgrading & maintenance of infrastructure, not subject to budgetary constraints –Ongoing maintenance and future capex Incentives in PPPs focused on providing a public service in the most possible efficient way: 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 Optimization 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 management, Automatic anti – icing

3 3 3 3 User paid schemes may bring additional advantages –If cost of service is reflected, they incentivize user to be efficient –Generate alternate sources of finance for the Government In certain markets, more reliable than Government funding –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 … and, of course, they are off Balance Sheet –Although in the medium term the problem will be financial, not just accounting: who pays rather than on whose Balance Sheet it sits Use of PPPs to fund infrastructure brings advantages more for their efficiency than for their accounting impact Trade off: Cost, Project IRR (WACC) vs. Cost of Government Debt –Sensible risk / return balance –Current environment (restricted access to financing) SUPPLY SIDE: ADVANTAGES OF PPPs (II)

4 4 4 4 DEMAND SIDE: DEBT RAISING STILL DIFFICULT While improving, markets are still restricting access to credit for private sector –Overall credit to private sector still decreasing Demand is also decreasing –Surge in demand for credit by public sector Potential for future crowding out … though growing public sector activity may create opportunities for PPPs Fuente: Banco de España Boletín Económico Julio – Agosto 2009 Spain

5 5 5 5 DEMAND SIDE: BOND MARKET IMPROVING, BUT NOT APPLICABLE TO NEW INFRASTRUCTURE PROJECTS Bond margins have rapidly decreased, but are still above historical average Low interest rates compensate margins (for now) –but not in longer tenors Yield differentials between 10 and 30 yrs 407ETR bonds in historical records Reduction in long term interest rates much smaller than in short term –… which are the ones needed for infrastructure projects Bond financing is a difficult instrument to fund infrastructure deals –No certainty of funding at time of committed offer –Disappearance of monoline insurers –Requires combination with bank bridge financing Source: Merril Lynch: European bond market report, Oct 2009

6 6 6 6 DEMAND SIDE: BANK FINANCING STILL LIMITED While easing, still a significant % of banks report tightening of credit criteria –Problem mainly risk outlook, no longer on funding –Close to 60% report increase in margins in riskier loans (i.e.: project finance), more than 20% decrease in size, close to 30% decrease in maturities Recent activity shows averse view of larger loans and longer tenors Outlook: Bank financing for projects likely to be limited –Disintermediation (i.e.: bonds) will grow challenges for financing projects In the absence of monolines, requirement of bridge financing Higher financing risk, higher equity requirement (Source: euro area bank lending survey Q209, ECB July 2009)

7 7 7 7 DEMAND SIDE: EQUITY LOOKS ABUNDANT BUT WITH CONDITIONS Limitations of traditional developers to maintain the rythm of investment –Access to debt –Equity markets still difficult for raising capital Increasing importance of pure financial investors –Infrastructure funds: dry powder in existing funds: US$ 71,5 Bn … of which US$ 21,4 Bn are allocated to European assets –Increasing interest from final investors (Pension Funds, Sovereign Funds, Family Offices) in investing directly in assets Financial investors have specific issues regarding risks and return –Averse to construction and significant operating risk Brownfields preferred to greenfields Association with traditional developers to mitigate those risks –Significant equity IRR requirements (above 12% for mature projects) –Require not only IRR but also cash yield Limitations on debt capacity Higher project IRRs –In many cases, limitation on maturity Most infrastructure funds have tenors of no more than 15 yrs –Require absolute transparency and predictable regulatory frameworks … and are in a position to compare internationally Potential development of a secondary market in which projects promoted by traditional developers are sold, when mature, to financial investors

8 8 8 8 DEMAND SIDE: IMPACT ON PROJECT COST Equity: Implicit market IRRs for listed highway concessionaires at 12% - 15% Impact of leverage, cost of debt and ROE on Project IRR … however, other positive elements remain or are reinforced –Efficient resource allocation –Pressure on Government spending –Efficiency Happy old days60% leverageMargin 250bpsROE+250 bps Cost of Debt5 % 6,5 % % Leverage75 %60 % ROE10% 11,5 % After tax project IRR 6,25%8 %8,6%9,5% Diff with Govt Debt2,25 pts4 pts4,6 pts5,5 pts In current market environment, financial appeal of PPPs decreases significantly

9 9 9 9 ADAPTING PPPS TO NEW REALITY: SHORT TERM Bidding process –Certainty of financing no longer exists Avoid long post preferred bidder phases (obtain approvals before) If not possible, introduce flexibility to re-adjust conditions –Easier to fund smaller projects: reduce investment and risk State or supranational to provide guarantees for the issuance of debt –For amounts consistent with investment grade ratings Underlying risk linked to predictable cash flows, not collaterals –Would give certainty on amount & cost of debt Recent state guaranteed issuances by Spanish banks placed at swap + 70- 80 bps –Could charge a premium (lower than the differential with private debt) Would not only save the interest, but generate a revenue –May be cancelled once market allows issuance of competitive private debt –Direct guarantee preferred to indirect (i.e.: minimum traffic) or partial coverage of specific risks Indirect guarantee likely to be penalized by market Partial risk and amount coverage forces to create a 2nd lien unsecured layer of debt which would be much more expensive

10 10 ADAPTING PPPS TO NEW REALITY: LONG TERM PPPs should be true partnerships, not Privately Funded Government Projects –Reasons for PPPs should not be budgetary constraints, but efficiency –Private Party should be given flexibility, under clear legal framework based on performance indicators, to run the project efficiently Management of initial investment Management of ongoing Opex Adapt projects to bond markets and international financial investors standards –Transparent regulation and consistent behavior of granting authority Change orders Delays in payments –Regulation should facilitate financing Facilitate creation of guarantees Facilitate step in rights Facilitate change in ownership Taxation regulation: need to provide municipalities with reliable and accountable tax revenues Increasing attractiveness of user paid schemes –May allow for efficient pricing of the public service –Create alternative to traditional taxation –With mounting Government deficit issues, user paid schemes may end up being more attractive financially

11 11 PPP FORMULAS: LIKELY EVOLUTION Short / Medium term –Surge of PFI schemes for off balance sheet reasons Trend likely to be discontinued while funding cost differentials between public & private risks are as high as today –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 PFIs in user paid schemes –Driver for PFIs: efficiency of private sector Likely bias towards projects with a significant recurrent cost component

12 12 IS PPP A PROVEN MODEL TO FUND TRANSPORT INFRASTRUCTURE? ABSOLUTELY Aggregate cumulative gross investment in transportation PPPs of the worlds largest developers: US$ 242,5 Bn

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