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2. 2 2 2 WORKSHOP 3: Building a European funding & financial framework for the TEN-T The role of PPPs & the private sector Enrique Fuentes, Development Director Ferrovial Chairman PPP Workgroup European International Contractors Zaragoza, June 2010

3. 3 3 3 PPPs HAVE ADVANTAGES AS A PROCUREMENT METHOD Efficient assignment of resources: PPPs solving actual capacity/demand problems are the most financially feasible Deliverability & accountability: Ensures development, upgrading & maintenance of infrastructure, not subject to budgetary constraints Incentives focused on providing a public service in the most efficient way –Construction focus on value engineering and early delivery: no cost overruns –Focus on Life Cycle costs and optimised O&M costs –Development of new technologies for better service / enhanced revenue User paid schemes may bring additional advantages –If cost of service is reflected, they incentivise user to be efficient –Generate alternate sources of finance for the Government –Contract with a 3rd party allows to avoid political review of tariff setting … 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

4. 4 4 4 FINANCING ENVIRONMENT Loan Market Focused in refinancing / re-structuring and in short term Pricing still well above pre-crisis maximums, and Δ considerably with maturity Typical structures: short term with specific take-outs and step-up pricing Liquidity has increased but Banks balance sheets are still highly leveraged –Uncertainty about removal of support measures press prices up and maintain risk aversion Underwriting appetite still low Bond Market Margins have decreased, but still above pre crisis highs Low interest rates compensate margins (for now), but less so in longer tenors, which are the ones needed for PPPs Bonds are a difficult instrument to fund PPPs (particularly riskier ones) –No certainty of funding at time of committed offer –Disappearance of monoline insurers –Requires combination with bank bridge financing DEBT AVAILABILIY & CONDITIONS RESTRICTED FOR PPPS (specially riskier ones: i.e. greenfields)

5. 5 5 5 MEASURES TO PROMOTE PPPS PPPs are 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 –Mitigate risks that the market cannot assume at reasonable costs –Combine EU / Government funding with PPPs –Evolutionary approach: risk coverages can decrease as experience accumulates Adapt projects to bond markets and international investors standards –Regulation should facilitate financing (guarantees, step in rights…) –Timely payments where revenues come from Grantor Support the financing –Direct EIB / Grantor loans –EIB products to supplement bank loans –Products to promote bond financing (tax exempt bonds?) Potential attractiveness of user paid schemes –May allow for efficient pricing of the public service –Create alternative to traditional taxation

6. 6 6 6 TRANSFER OF DEMAND RISK Advantages If cost of service is reflected in price, they incentivise user to be efficient Generate alternate sources of finance for the Government The above two can be achieved by tariff collection by Government, without transfer of demand risk, but Contract with a 3rd party allows to avoid political review of tariff Reduce Government expenditure & risk Natural earmarking of revenues to improve infrastructure Incentivices service to user to promote patronage In mature projects, risk differential is reduced Disadvantages Increases risk & cost of project –In particular for greenfields and riskier projects –… but may be combined with risk mitigants Requires long term track record –Difficult to apply to rail and to other development PPPs Possibilty to combine both types: availability schemes for riskier / development / rail projects; transfer of demand risk for mature ones

7. 7 7 7 PPPS FOR RAIL PROJECTS: ISSUES In many cases, investment cost exceeds what can be recovered with economically sensible user fees –Normally, user fares scarcely pay for opex + rolling stock –However, it may be possible to identify quick win projects Specific tranches in a high traffic corridor (city by-passes, connections) Moderate investments that can improve operativity Demand / revenue may be difficult to forecast –It is not direct demand, but would depend on external agent (carrier) Track record not long enough For passengers, mostly on national operators who may not be market driven For freight, private operators with significant intermodal competition & uncertainty on other external factors (traffic prioritisation, signalling) –Require mitigation: take or pay contract, minimum guaranteed traffic or availability schemes … at least until there is sufficient track record But private sector involvement can deliver improvements in capex & opex Most projects will likely require schemes that de-couple investment costs from project revenues: subsidies or availability schemes –But they may be funded from earmarking of other revenues generated in the corridor or other cross finance formulae