Better Life Time June "AA constructive response to the demographic challenge"

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1 Public Private Partnerships (PPPs) Better Life Time June 2007 "AA constructive response to the demographic challenge"

2 André Autrand Head of European Public Sector Department «The different forms of public-private partnerships in Europe»

3 Presentation Plan I. Introduction to PPPs II. General aspects III. Accounting aspects IV. Financial structuring V. Examples of PPP VI. Compagnie Benjamin de Rothschild

4 I Introduction to PPPs

5 Introduction to PPPs Public Private Partnerships cover a wide variety of working arrangements and financial structures that offer the opportunity for the private and public sectors to become involved in a relationship which will see the expertise of both sectors being used to deliver, operate and maintain public sector assets and services.

Introduction to PPPs PPP / PFI in the UK: Total of >620 PFI projects signed so far (June 2004) with a capital value of 40bn n In 2003, the worlds biggest project finance operation : London

6 Introduction to PPPs PPP / PFI in the UK: Total of >620 PFI projects signed so far (June 2004) with a capital value of 40bn n In 2003, the worlds biggest project finance operation : London Underground (3.9 Billion Euros) Study by NAO showed that 73% of PFIs were delivered to budget (vs. 27% procured by traditional means) and 76% of projects were delivered on time (compared to 30% traditionally procured) Substantial cost savings achieved Current investments Total billion (26 billion Euros) Planned investments Total 12.3 billion (18,5 billion Euros) Defense Hospitals Local Governments Schools Transports

7 II General aspects

8 1. The parties involved Public sector and private sector protagonists generally intervene in PPP projects. They can be classified within three categories : Public sector Private sector Industrial entities Public entities Financial institutions

9 2. Parties Goals The parties goals Public entities Compliance with the public procurement legislation Suitability of the budgetary payment profiles Outsourcing EUROSTAT aspects taken into consideration Transparency in the choice of the private contractor and the financial institution Private contractor Matching its clients goals and constraints Optimized risk allocation Compliance with applicable accounting rules (IFRS) Financial institutions Optimization of the financing risk/performance ratio

10 3. Main characteristics of a PPP Private contractor will provide the following services : Ø Ø Building construction Financing Ø Staggered payments Ø Taylor made payment profiles adapted to the budgetary capacities of the public entity Ø Payment profile possibilities: Linear Progressive Reducing balance depreciation Payment with a franchise period Ø Related services (maintenance, day-to-day managing ) Beyond building equipment supplying, a different management model for the concerned public entity PPP projects offer budgetary flexibility PPP projects allow outsourcing

11 4. Existing financing schemes Possible financing schemes Public Consolidated in the Public Sector Budgetary financing B&T(Build&Transfer) Possibly not consolidated PPP (BOT : Build, operate, transfer) PPP (BOOT : Build, own, operate, transfer) Private

12 5. Comparative factors 1/2 Classic scheme Public Entity Innovative scheme Private Entity Assets Liabilities Assets Liabilities Infrastructure Equipment Related Debt Infrastructure Equipment Related Debt Examples of additional costs to be taken into consideration : ÄVariation of the credit spread ÄTax-related costs ÄInsurances

13 5. Comparative factors 2/2 EUROSTAT frontier Market interest rate Credit Spread State needs to consolidate State does not need to consolidate Credit margin Subscription fee -Insurances -Tax-related costs -Creditspread variation Insurance expenses Hedging of interest rate risk Classic Financial Scheme Innovative Financial Scheme State financed

14 III Accounting aspects

15 1. Impact of the operation on the stability pact ratios As long as a financial operation concerns the public sector of a EU country Necessity to assess the possible impact on the stability pact ratios Public deficit ratio Public debt ratio

16 2. EUROSTAT Regulations Ratios defined by the Stability Pact Article 104, 2, of the European Communities Treaty Article 11 of the annexed protocole Ø Public Deficit ratio : Net financial requirement/capacity of the consolidated public administrations (in percentage of the GDP) Deficit criterion < 3% Ø Public Debt ratio : The public debt refers to the nominal value of the consolidated statements for a period ending on the 31st of December (in percentage of the GDP ). Debt criterion < 60%

3. Deficit and debt ratios in the EU (2006) Belgium 0,1% 6,8% 0,2% 89.

30,2% -1,1% 62,2% Italia -4,4% 106,8% Finland +3,9% 39,1% Greece -2,6% 104,6%

Lituania 48,7% 46,9% 2,9% -0,3% UK 15 first members 18,2% 24,9% Czech Deficit

30,7% 12 new members -1,7% France Hungary Deficit 67,9% -9,2% Debt Austria

17 3. Deficit and debt ratios in the EU (2006) Belgium 0,1% 6,8% 0,2% 89.1% Luxembourg Portugal -3,9% 64,7% Spain 1,8% 39,9% -2,5% 63,9% Denmark +4,2% 30,2% -1,1% 62,2% Italia -4,4% 106,8% Finland +3,9% 39,1% Greece -2,6% 104,6% Estonia +3,8% 4,1% Lettonia 0,4% 10,0% Netherlands Sweden 0,6% +2,2% Ireland Lituania 48,7% 46,9% 2,9% -0,3% UK 15 first members 18,2% 24,9% Czech Deficit -2,8% Republic Slovakia Debt Poland -3,4% 43,5% -2,9% Germany -3,9% 47,8% 30,4% 30,7% 12 new members -1,7% France Hungary Deficit 67,9% -9,2% Debt Austria 66,0% Malta -2,6% 66,5% Bulgaria 3,3% 22,8% Romania -1,9% 12,4% Slovenia -1,4% 27,8% Cyprus -1,5% 65,3%

18 4. EUROSTAT general appreciation criteria Key Criteria Public sector delimitation Public property Risk transfer Selling price / Fair value How the public entity or public service is managed When relevant, differentiation between operational lease and financial lease

19 5. EUROSTAT criteria prioritization EUROSTAT February 11th, 2004 decision (Key PPP decision) : Accounting impact on national accounts of contracts subscribed between public authorities and private contractors. The decision clarifies the impact on the public deficit/excedent and on the public debt Eurostat recommends that assets linked to a public-private partnership (PPP) should be classified as non-public assets and therefore not be accounted for in the public administrations balance sheet whenever the two following conditions are verified : The private partner bares Construction risk AND Availability risk OR Demand risk

20 IV Financial structuring

21 1. Constraints n Four constants of a PPP contract : Ä Adjustment of public payments Ä Improvement of the valuation of public assets Ä Outsourcing of the functions normally assumed by public people Ä Risk transfer from the public sector to the private sector

22 2. The PPP Model 1/2 A typical Public Private Partnership structure Characteristics of PPP projects : Lenders Authority Special Purpose Company (SPC) Shareholders Projects are tendered from the Authority (Government / department) to the private sector which commits to : Ø build ; Ø finance ; Ø own ; Ø operate the assets. Authority to fund partially investments through up-front/annual subsidies. Operating Company Construction Company Necessity to distinguish construction aspects and financing aspects. Risk Transfer from Authority (public) to Corporates (private). Necessity to have a long term time horizon, between 20 to 40 years.

2. The PPP Model 2/2 Main Contractual Arrangements : Authority Concession / Project Agreement Sponsor / Shareholder Agreement Concession Agreement Finance Agreement Lenders Finance Agreement Special

23 2. The PPP Model 2/2 Main Contractual Arrangements : Authority Concession / Project Agreement Sponsor / Shareholder Agreement Concession Agreement Finance Agreement Lenders Finance Agreement Special Purpose Company (SPC) Shareholder Agreement Shareholders Commercial Agreements (subcontracts) Allocation of Risks : Operating Company Sub Contracts Construction Company Party Shareholders Construction Phase Provision of Equity minimal Operational Phase Sub Contractors Sub Contractors SPC Construction Co. Minimal Cost for asset Delivery Repair & maintenance None Operating Co. Phase-in Service costs Service Delivery Project insurance Repair & maintenance

24 3. Advantages Advantages of a PPP : Higher budgetary flexibility Minimizing of public expenditures Optimized risk allocation through the transfer of the risk Compliance with time schedules and allocated budgets Accelerated infrastructure availability Optimized asset valorization Compliance with European public accounting regulations Risks transferred Construction risk Availability risk Delay risk Demand/Trafficrisk

25 4. Optimization In order to optimize the cost of funding, it is important to ensure the assets and rights : Bankability Transferability Flexibility Liquidity Optimizing of overall financial costs through an independently lead bank tender offer procedure

26 V Examples of PPP

27 FEDIMMO Real estate Sole financial adviser Monetization and sale to private investors of 62 State owned buildings(eur 670M). La Compagnie Benjamin de Rothschild intervened as financial adviser for the structuring, negotiation and sale of the State owned buildings. The main aspects of the mission were : Ä Ä Ä Ä Ä Ä Optimization of the financial structure regarding the risk profile of the operation Analysis of the budgetary constraints of the State and the EUROSTAT aspects of the operation Study of the economic environment, notably on the Belgium real estate market Analysis of the most appropriate financial tools available on the markets Set up, implement and manage the tender process and the bidding contest. Negotiation and preparation of all contractual documentations

28 PPP Real Estate Exemple of an airport project in a multinational environment : Asset monetization for SWISS (Eur 200 M) Sole financial advisor: Compagnie Benjamin de Rothschild Compagnie Benjamin de Rothschild is mandated to monetize real-estate facilities on the airport land. Compagnie Benjamin de Rothschild has to deal with the different legal frameworks (French and Swiss) in a public legal and managerial environment in order to elaborate a financial scheme which is agreed for by the different parties : ÄSWISS ÄEUROAIPORT Äthe French and Swiss administrations.

29 PPP Real Estate Example of a PPP in the Buildings sector : Congress center financing (Eur 80 M) Compagnie Benjamin de Rothschild advised SA Palais des Congrès de Bruxelles as a financial advisor. Compagnie Benjamin de Rothschild was mandated to : Ä to elaborate a financial scheme ; Ä to prepare the tender process ; Ä to assist the parties for the financing and the renovation of the Congress center in Brussels.

Targets : Ä Ä substantial acceleration of the construction of a crucial telephony network for the police force;

30 PPP/ telecom - Acropol Sole financial advisor First innovative financing of a public market carried out in France (Eur 650M). Deployment of the radio operator network of the French National police force, in the form of a PPP. Targets : Ä Ä substantial acceleration of the construction of a crucial telephony network for the police force; spreading out of the public expenditure over many years. Project announced by the French Parliament as an "example to follow".

to evaluate the possibility to finance the project through a Public

31 Defense sector - FREMM Sole financial advisor Financing of a military equipment program (Eur 5 000M) The main objectives of the mission were : Ä to evaluate the possibility to finance the project through a Public Private Partnership ( PPP ) ; Ä to assist and advise the parties during this process.

Compagnie Benjamin de Rothschild was mandated by the World Bank and the APIX The main objectives of the mission were : Ä the analysis

32 PPP/ concession - Motorway Sole financial advisor Motorway project between Dakar and Diamniadio (Sénégal), in the form of a PPP (Eur 250M). Compagnie Benjamin de Rothschild was mandated by the World Bank and the APIX The main objectives of the mission were : Ä the analysis and definition of the financing scheme ; Ä the pre-marketing, the qualification process and the selection of investors ; Ä the assistance for the meetings and contacts with the public Ä authorities and the investors; Ä the implementation of the financing scheme.

The main objectives of the mission were : Ä the conception, the structuration, the implementation and the execution of the financial scheme ;

33 Railway sector - CDG-Express Project Sole financial advisor Railway line between Roissy Charles de Gaulle Airport and Paris (Eur 630M). Advisor of the French State for the definition of a contractual arrangement and the procedure of procurement and making of the contract. The main objectives of the mission were : Ä the conception, the structuration, the implementation and the execution of the financial scheme ; Ä the organisation and the monitoring of the financial institutions tender offer procedure ; Ä the assistance until the execution of the financial scheme.

Railway-telecom sector / GSM-R Sole financial advisor La Compagnie Benjamin de Rothschild is the sole financial advisor of the French State and réseau Ferré de France for the definition of a

34 Railway-telecom sector / GSM-R Sole financial advisor La Compagnie Benjamin de Rothschild is the sole financial advisor of the French State and réseau Ferré de France for the definition of a contractual arrangement and the procedure of procurement and making of the contract GSM-Rail. (EUR 700 millions) The main objectives of the mission are : Ä the conception, the structuration, the implementation and the execution of the financial scheme ; Ä the organisation and the monitoring of the financial institutions tender offer procedure ; Ä the assistance until the execution of the financial scheme.

35 VI Compagnie Benjamin de Rothschild

Introduction to LCF Rothschild Group LCF Rothschild Group : Compagnie Benjamin de Rothschild : Company of LCF Rothschild Group Based in Geneva n n n International banking group European with

36 Introduction to LCF Rothschild Group LCF Rothschild Group : Compagnie Benjamin de Rothschild : Company of LCF Rothschild Group Based in Geneva n n n International banking group European with headquarters in Geneva Independent and privately controlled n Principal activities of CTBR : Ä Corporate Finance / Debt Advisory PPP /PFI Public Sector Infrastructure Telecommunication / Technology / Media Ä Risk Management Interest rates risk Foreign exchange risk Ä Quantitative Asset Management

37 Key characteristics : Compagnie Benjamin de Rothschild as Independant Financial Advisor Ä Ä Ä Ä Identification of the financial and industrial aspects independent analysis of the various participants needs and constraints with no prejudices for a specific solution or financial instrument ; CTBR independence and neutrality allowing objectivity not only for the structuring of the financial solution but also throughout the bank tender process ; transparency of information towards the public authorities. CTBR team is a combination of professionals having worked in : Ä Ä the public sector on a European, national and local level, such as the European commission, the French Ministry of Finance or the Région Ile-de-France ; corporate finance specialists with a large investment banking experience notably in Public Private Partnership, structured finance and project finance.

38 2. Staging of the mission Phasing of the operation Inception stage Initial study phase Negociation phase Decision Definition of the financig scheme Execution stage Assistance during the meetings and contacts with the public administrations Implementation of the financing scheme

39 Presentation André Autrand - Directeur du département Secteur Public Europe de la Compagnie Benjamin de Rothschild Graduated from the Ecole des Hautes Etudes Commerciales (HEC) and of the Ecole Nationale d Administration (ENA). He has hold several leading positions in the Direction du Budget of the French Finance and Economy Ministry from 1986 to 1990 before joining the European commission as European Commissioner adviser in charge of the tax harmonization from 1990 to From 1993 he was in charge of the international sector and then the industrial, energy and public companies sectors in the Direction du Budget of the French Finance Ministry before joining in 1996 the Région Ile-de-France as Chief Financial Officer. Since 2003, Head of European Public Sector department of La Compagnie Benjamin de Rothschild. As such, has been involved in major PPP across Europe in Belgium, France, Portugal.

40 Warning & Copyright Warning La Compagnie Benjamin de Rothschild does not warrant the accuracy, reliability or legality of any information or material contained herein. The information supplied does not constitute financial advice and you should seek independent advice before undertaking any financial transactions based on information supplied herein. La Compagnie Benjamin de Rothschild does not accept any liability whatsoever for any loss or damage suffered or incurred as a result of your relying on information or material published in this study. The information supplied is provided subject to the laws of the Switzerland and may only be accessed from other jurisdictions at the same risks as the person accessing such information. Copyright La Compagnie Benjamin de Rothschild Reproduction of part or all of the contents of any of these pages is prohibited except to the extent permitted below. This study is for personal use provided that it includes this copyright notice on each copy and that no alterations to any of the pages is made and do not use any of the pages in any other work or publication in whatever medium stored.

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