Applied Workshop on Preparing Infrastructure Projects 21 th - 25 th March Bangkok DAY 2

Transcription

1 Applied Workshop on Preparing Infrastructure Projects 21 th - 25 th March Bangkok DAY 2 1

2 2 Recap of Day 1

3 Applying central concepts to structuring PPP projects S1: Project screening S2: Defining project characteristics S3: Output specification S4: Risk allocation S5: Project structuring S6: PPP Contract S7: Contract Management Plan S8: Procurement Planning 3

4 4 Session 2: Project Characteristics and PPP Financing

5 Basic Characteristics What is the public service (infrastructure)? Who are the users? Greenfield (new) or brownfield (existing)? What is involved in the service? (e.g. station, infra, trains, signaling, etc ; generation / transmission / distribution, etc ) What assets are involved (e.g. buildings, facilities, equipment, etc.)? Large, small; complex, simple; etc What scale of investment? How long do these assets last? Project life-cycle costs initial investment versus operation & maintenance? How does the funding / payment work? (next slide ) 5

6 Expenses Revenues Kosten Opbrengsten Project Life Cycle Optimization / Perspective Need to consider the full Project Lifecycle all costs and revenues over project life (e.g. 25 yrs) Lifecycle optimization (e.g. capex-maint. balance) NPV Tijd Capital expenditure Operational expenditure Operational revenues Post-operational value Increase value by decrease investment costs or operating costs, increase revenues during and after operation, pull revenues forward in time and push costs back. 6

7 Funding / Payment will be critical PPPs are not free lunch someone must pay How are (or will) the services be paid for? By users directly By government Two types of PPP Revenue-based PPP (users pay firm directly) Availability-based PPP (government pays firm) And hybrid above options plus firm generates commercial returns from assets (e.g. parking, canteens, accommodation, etc.) 7

8 Two Dimensions to PPP Money Funding How the project generates money e.g. toll fees, user payments, availability payments, etc. Internal Business Case of the project Does it have enough revenue over time to cover costs, is it feasible, is it commercially viable? Viability gap funding, subsidies, etc. Financing How temporary money is organized to implement the project e.g. loans, equity, etc. Money provided in exchange for a return from the project over time Does the project generate enough money over time to pay for the financing, is it bankable? Is it financed by the owner, or by the project? 8

9 Project Financing in PPPs Page 9 The principal difference between debt and equity financing. DEBT FINANCING: fixed-income, fixed rights Principal repayments: FIXED Interest payments: FIXED Costs of finance EQUITY FINANCING: variable income, residual claim rights Equity repayment: residual capital liquidation Dividend payments: residual free cash flow 9

10 Two Main Forms of Financing Corporate Finance The company borrows Project Finance The project borrows Multiple projects All company assets at risk Balance sheet financing Risk is an input Exit not clearly defined One project, one cash flow Non or limited recourse Focus on project risks Limited life span / clearly defined exit On balance sheet of the company Off balance sheet of the company 10

11 Project Financing often preferred in PPPs Finance "off-balance" Integrate and coordinate different competences Achieve better incentives Get more (cheap!) debt financing as a share of total financing Get better risk management Sponsor s balance sheet is not burdened by the financing (which instead lands in the SPC) All companies involved put their (equity) capital at risk by becoming shareholders of the SPC Ability to use payment mechanism, scrutiny of private finance, prevent agency problems Higher leverage possible due to clear ring-fencing of project cash flows Due to leverage and single-project focus, SPC is much more sensitive to risk i.e. enhanced risk management 11

12 Project Financing in PPPs Page 12 A typical (but fictional) project finance cash flow 2,000,000 1,500,000 1,000, , ,000-1,000,000-1,500, ,000,000 Operational Taxes Investment Financing Dividend Cash

13 13 Financial Model Cockpit

14 Financial Flows Often used measures: NPV (net present value): Total of all future cash flows in terms of todays money. (should be a positive number) IRR (internal rate of return): What is the return the investor makes?(should be higher than you get at the bank, because the project is probably riskier) Pay back period: how long does it take to pay the investor back? (should be shorter than the project duration) DSCR (debt service coverage ratio): will there be enough money to pay the interest and repayment of the bank?(in the case that a bank supplies part of the financing) (should be (much) larger than 1 in every year) 14

15 Effects of Private Financing on Projects and the Market De facto cost of financing higher than pure public financing BUT Discipline from the financial markets and market memory High scrutiny of the underlying project characteristics (performance, risks, revenues, etc.) Strong focus on capacity of the participating firms Close scrutiny and performance pressure on the public partner (e.g. Dabhol Power Plant effect) Continuous pressure from debt providers on private operator performance (ultimately with step in rights) Requirement for longer term (equity and debt) providers opening especially role of institutional investors 15

16 Public Budget Project / Investment Constraints Government budget often lacks capital expenditure to invest in: Proper maintenance Rehabilitation New projects - $$ (Budget Spending) Capital Expenditure Hurdle Years 16

17 PPP Budget Impacts Help but no Free Lunch PPPs can change how the public budget pays for a project Off-budget financing de facto a major driver for PPPs - $$ (Budget Spending) PPP Availability Payment (or foregone revenues) Years 17

18 PPP Budget Impacts Budget Ceiling etc. Years PPP Contract 8 PPP Contract 7 PPP Contract 6 PPP Contract 5 PPP Contract 4 PPP Contract 3 PPP Contract 2 PPP Contract 1 Multiple PPP Contracts commit the budget over the long term Caution and monitoring required 18

19 Viewing effects in financial model Variables affecting basic business case ( funding ): Capex Opex / maintenance Traffic Tariffs Variables affecting financing costs ( financing ): Debt interest rates Leverage Importantly, keep financing and the basic business case NPV separate if I can get financing cheaper than you, that says nothing about the project itself 19

20 Case Work Review and discuss your project Discuss and describe project characteristics: Service Users Greenfield / brownfield Assets / scale of investment Duration of assets Lifecycle costs initial investment versus operational Funding Be prepared to make a brief report back to plenary 20

21 21 Session 2 Plenary Group Report Back

22 22 Session 3: Output Based Specification

23 Applying central concepts to structuring PPP projects S1: Project screening S2: Defining project characteristics S3: Output specification S4: Risk allocation S5: Project structuring S6: PPP Contract S7: Contract Management Plan S8: Procurement Planning 23

24 Output Specification A central part of the RfP / ToR for the project What service must the project deliver? 24

25 What is Input Specification? EXAMPLE OF A BRIDGE CROSSING A RIVER Government prepares detailed specification for a bridge (input) Government determines exactly how it should be built, what materials used, and makes the detailed plan and design (input) Construction company is hired to build the bridge (usually based on cheapest price) construction contract If the bridge does accommodate the traffic (or could have been better or cheaper) it is the government s problem Consequence of Input Specification: Limited private innovation (they just build what government asks for) All design, operation and maintenance risk stays with government 25

26 What is Output Specification? Government specifies it wants traffic to cross the river (output) Government invites companies to propose the best solution (this could be a bridge, a ferry or a tunnel) Government hires the company with the best solution to provide that solutions PPP Contract where company only gets paid over future years if their solution works Consequence of Output Specification: Space for private companies to innovate and determine best solution Company is at risk over time if their solution does not work (hence they will get it right) 26

27 Input Specification Output HIGH LOW 27

28 Minimum Standards Output specification in conjunction with minimum standards Minimum standards, for example: Environmental norms Transport safety requirements ISO certification / accreditation Health and safety standards Labour and employment standards Civil Aviation Authority (CAA) regulations And so on Specify minimum standards as a compliance requirement (e.g. must comply with applicable road safety standards), or a performance / output requirement (e.g. must obtain relevant accreditation within xyz period) Minimum standards requirements can still leave scope for the private partner to determine the best way for these to be achieved 28

29 Output Specification is a BIG CHANGE for government Usually new approach, with consequences Can be more difficult to do than input specification Should cover ouputs required as well as minimum standards (e.g. environmental requirements, etc.) that must be met Should be able to be monitored and measured in practice: Contract compliance manager External agencies (e.g. regulators, oversight bodies, ISO certifiers) 29

30 Case Work Discuss your project Define a few main possible output specifications for the project Indicate whether and how each one will allow for private innovation Indicate how the output could be monitored and measured Identify if any minimum standards would apply to the project Be prepared to make a short report back to the plenary 30

31 31 Session 3 Plenary Group Report Back

32 Rolf Dauskardt (mobile) Patrick Rosales (mobile) Rebel Wijnhaven WH Rotterdam Nederland REBELGROUP.COM