DŮVĚRNÉ

How has financial crises changed PPP market?

Typ dokumentu
Filip Drapak Datum
World Bank Institute
May 2009
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Měrná jednotka

"Infrastructure offers significant investment opportunities for long-term investors,

even in a time of global crisis"

Ngozi N. Okonjo-Iweala, Managing Director,

World Bank, December 2008

“Recent review of infrastructure projects for the last six months, including social
projects, statistics revealed that 50% were unaffected by the global financial crisis,
25% had had substantial increases and 25% had been cancelled.”

Tadesse Admassu, Development Bank of Southern

Africa (DBSA) international division executive vice-
president, April 2009

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 Key issues of PPP in financial crises
Měrná jednotka

 PPP economics have changed

 Lack of funding on both equity and debt side

 Lack of interest of investors and operators

“The monoline wrapped bond market, which has been the financial structure
of choice for large PFI projects over the past 10 years, is now effectively
closed to new transactions. This has increased reliance on the banking
market.

The combination of capital adequacy requirements, reduced liquidity and

higher funding costs has increased the strain on the project finance banking
model. While the banks’ views of the PFI risk profile have not changed
materially, funding availability is limited and credit margins have moved up.”
Andy Rose, Executive Director, PUK

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 PPP economics have changed
Měrná jednotka

 Economic cycle has to be taken in to the account

“Equity price bubble busts every 13 years on average,

last for 2 ½ years and are associated with GDP losses
of 4 percent of GDP. Housing price busts are less
frequent, but lasted nearly twice as long and were
associated with output losses that were less twice as
large…”

World Economic Outlook

 Risk management and mitigation implication

(a) Country risk

(b) On project risk
(c) Refinancing risk

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 PPP economics have changed
Měrná jednotka
 Implications for the VfM

(a) Projects less likely to achieve VfM

- Increased cost of equity

- Increased role of equity and proportion of equity financing
- Increased cost of debt (offset by lower interest rates?)

(b) Fiscal space implications to VfM

(c) Some governments more rigorous on VfM and can be more keen on
litigation

Ernst & Young’s P3 team in the UK infrastructure reports that the

average margin for availability payment-based P3s, increased from
82bps to 94bps between May and August 2008. Volume based
payment P3 projects had average margins of 155bps in August
2008, which is increase of 50bps since credit crunch.
Ernst&Young’s UK infrastructure report

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 PPP economics have changed
Měrná jednotka

 VfM might be lost at the current market, this can however be offset by fiscal
and macro economical benefits of PPP

PPP lifecycle cost PSC: public model

VfM lost
equity

debt

“Greater emphasis also needs to be made towards the social economic

benefits delivered to a country or region which could mean adopting a more
visionary approach to PPP models to include agglomeration benefits. Failure
to do so will mean that PPP projects may never get off the ground on a pure
cost benefit basis.”
EC Harris, Is PPP dead and buried?
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 PPP economics have changed
Měrná jednotka

 is there evidence for change in economics of PPP?

Global project finance 2007/2008

51.3
Equity financing
74.4

15
Bond financing
5.7
2007
2008
212.1
Loan borrowing
234.9

Global project 278.4

finance 315

0 50 100 150 200 250 300 350

USD billion Project finance 2009

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 PPP economics have changed
Měrná jednotka

 is there evidence for change in economics of PPP?

Change in 2008 in %

60
45
40

20 11

0 Loan borrowing
Loan borrowing Bond financing Equity financing Bond financing
%

-20 Equity financing

-40

-60
-62
-80
Project finance 2009

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 Global PPP in 2008
Měrná jednotka

 Volume of PPPs have stagnated in 2008 on the 2007 level with growth mainly
generated in North America region (203% growth), however the 4Q volume fell
38% (in comparison to 4Q 2007 volume)

Global PPP in 2008

Midle East anhd North Africa 4.5

Asia 11.3

North America 8.4

Spain 4.6

Portugal 6.4

UK 10.9

Global PPP 67

0 10 20 30 40 50 60 70 80

Project finance 2009 USD billion

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 Case study: A1, Motorway in Germany
Měrná jednotka
 This is 72 km of existing motorway that shall be widened and refurbished

PPP type: DBFO concession (design, build, finance and operate)

Length: 30 years
Contract value: EUR 650 million
Financiers: HVB, Caja Madrid, DZ Bank
Sponsors: John Laing, Bilfinger Berger, Johan Bunte
Financial closure: 10 July 2008

 Original banks “disappeared” (Bilfinger Berger)

 Bigger margin than expected, flexible rates (fixed were expected)
 Smaller commitments from banks
 However largest PPP in Germany so far

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 Case study: M6 Phase III Motorway in Hungary
Měrná jednotka
 This is 65 km motorway extension in Hungary

PPP type: DBFMO (design, build, finance, maintain and operate)

Length: 30 years
Contract value: EUR 520 million
Financiers: EIB and consortium of banks
Sponsors: Bilfinger Berger, Porr Solutions, Egis Projects
Financial closure: 17 June 2008

 Larger number of banks than initially expected (10 instead of 4)

 Bigger margin than expected, flexible rates (fixed were expected)
 Smaller amount raised
 EIB refinanced EUR 200 mill. only two weeks after financial close
 “Financial closure delay of few weeks would kill the deal” Bilfinger Berger

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 Case study: Mexico’s Farac I and II projects show how market
conditions have changed at project level
Měrná jednotka
Farac I (30 year concession)
Characteristics: Four roads spanned
550 km in west-central region.
Construction cost US$137 million
Tender date: Aug 2007
Number of bidders: 6 consortia
Sponsors ICA and Goldman Sachs
Winning bid: US$4.17 billion
47% higher than gov and
market expectations
Debt/equity: 80/20
Project revenues: Toll fees
Project funding sources:
US$3.4 billion local denominated
currency, short-term mini perm
financing (Commercial banks)
Lending was done on the
expectation of refinancing through
securitization which has not happen
yet.
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Farac II (30 year concession)
Characteristics: Three roads spanned
850km of which 370 km is new construction
in Pacific coast.
Tender date: 27 Feb 2009
Number of bidders: 2 consortia
Minimum price: US$2.29 billion:
Public bank contribution: Banobras to
provide Pesos15-18 billion to successfully
bidder and Fonadin to provide up to 30% of
debt
Issues other than financial crisis:
Concerns over right of way
Sponsor skepticism over government traffic
projections
Status: Canceled. STC: both bids too low
Project will be restructured and retendered
Source: Ada Karina Izaguirre, PPIAF, World Bank
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 D1 and R1 in Slovakia
Měrná jednotka
 Financing of PPP without development banks not feasible

“The crisis has narrowed the financing opportunities from banks,” the
Construction Ministry wrote about the impact of the unfavorable financial
market on PPP projects, as cited by the TASR newswire. “The liquidity
shortage has a much bigger impact on the banks’ decision-making than
the quality of the projects or the financial standing or rating of the Slovak
Republic.”

The ministry is looking for ways to finance the PPP projects from the
European Investment Bank and the European Bank for Development and
Reconstruction.
The Slovak Spectator, 2009

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 Policy and Governance implications
Měrná jednotka
 Procurement has to be more flexible, shorter and financial market risk sensitive

Market flexibility and procurement flexibility

Procuring authorities are suffering from the higher financing costs and bank
fees, as well as greater transaction costs from procedures and negotiations
that are taking longer to conclude. One risk is that final bids that were thought
to have committed financing are reopened as debt continues to be re-priced.
It’s no longer realistic to insist on committed financing at the bid stage – most
lenders require price flex, or indeed market flex clauses (in which most terms,
not just pricing, can be adjusted). This makes it impossible to conclude the
financial evaluation of private partner proposals until much later in the
process, and sometimes not even until days before financial close.

This creates significant headaches for procuring authorities. How can a

preferred bidder be selected if the financial proposal is not known with great
certainty? How can competitive tension be maintained in final lending
negotiations until well after preferred bidder selection? Should government
share the pricing risk to which the preferred bidder is currently exposed? In
one current UK social infrastructure P3, the c. $150M debt package has been
re-priced twice since April this year, and closing has been delayed.
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 Policy and Governance implications: introducing DFC
Měrná jednotka
 As one of potential policy measures to improve the financing of PPP
projects UK government used so called DFC (Debt Funding Competition)

What is a DFC?

A DFC is an initiative that has been employed in the UK a number of

times since 2000 and has been championed by the UK HM Treasury
as a mechanism for government to induce competition and thereby
obtain more favorable debt funding terms.

When using a DFC, government selects a preferred bidder and that

preferred bidder, in consultation with government, then goes to the
debt market seeking the best price for the debt funding for the
project.
The objective for the UK government was to increase the
competitiveness of the lending market with a view to reducing the
overall cost of the project.1 We are now in a very different market
where the primary focus of the DFC would be to source sufficient
debt funders willing to lend to the project.
David Lester and Chris Keane, 2009

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 Policy and Governance implications: introducing new
Měrná jednotka institutions and guarantee support mechanisms

 The solutions often suggest new institutions, from US discussion regarding

the Infrastructure bank, ideas of setting up national guarantee instruments to
the discussion on a new role of multilateral and development institutions.

How to mitigate the impact of the financial crisis on PPPs2009

The French Institute for PPP (IGD - Institute de la Gestion Déléguée)

released in November its proposals to mitigate the impact of the financial
crisis on PPPs in France. IGD suggests to address the issue of lack of
liquidity through the delinking of the duration of contracts and the duration
of loans that would allow the short-term financing of projects and its long-
term refinancing when market conditions will be more favorable, and the
creation of a special public vehicle that would be entitled to collect and
provide long-term resources to support banks activities.

IGD also proposes to reduce the impact on costs through a special state
warranty on local authorities’ projects, and calls for a broader public
support through investment subsidies when construction periods are
important.
Pierre Van de Vyver, 2009
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 Conclusions
Měrná jednotka

 PPP economics jeopardized by financial crises impact, however this is

temporary impact

 PPP is not solution in time of financial crises – do not attempt to stimulate

economy using PPPs

 Smaller transactions and larger risk diversification are demanded by the

financial market

 Long maturities still available but costly

 Bigger role for development banks and multilateral institutions

 Governments should focus on building the pipeline for the future post
financial crises PPPs and improve policies and procedures for the bidding to
accommodate current situation, perhaps introduce debt funding competition
(DFC)

 Bond, wrapped or privately insured financing not really available

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