Lafarge Presentation

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Public Private Partnerships Risks which a
Lender may assume
30 September 2005
Jonathan Drew HSBC Corporate, Investment Banking
and Markets
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Contents

• A Typical PPP Structure
• Benefits of Third Party Funding
• PPP Risk Allocation and Lenders Appetite
• Risk Allocation and Finance Structures
• Financing Issues and Implementation

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A Typical PPP/PFI Structure
Government
Construction
Performance Payments
Services
Debt
Finance
Special Purpose Vehicle
Equity
Operation
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Benefits of Third Party Financing

• Access to wider sources of capital for large
  scale funding requirements
• Improved and more secure funding streams
• Assists short term budget management
• Capital at risk motivates participants to achieve
  a more efficient outcome
• Lower risk to public sector due to rigorous
  private financing process
• Credit provider will seek to ensure adequate
  protections and mitigants are in place
• Government retains operational and planning
  responsibility
• Government pays only when project are available
  and performance is up to standard
• Ability of private sector to deliver on cost
  effectiveness/efficiencies offsets
• higher financing costs
• Better value through risk transfer, whole life
  costing and competitive process

Certainty of Funding Appropriate Risk
Allocation Value for Money
Public Sector can focus on delivery of core
service functions
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Lenders Repayment Mechanism
PPP/PFI Funding/Payment Approach
Traditional Public Funding/Payments


Exposure to construction cost overruns
No payments until facilities available for use
Dollar amount of the service payments locked-in
prior to commencement
Exposure to construction time overruns
Exposure to operating cost overruns
Time
Time
Construction period
Operations period
Estimated costs
Government exposure
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A PPP contractual structure appropriate risk
allocation
Conventional procurement
Typical PPP/PFI

• Design construction
• Service provision
• Maintenance and renewal

• Design construction

• Service provision
• Pre-existing conditions
• Maintenance and renewal
• Regulation/policy
• Market / Volume

• Pre-existing conditions
• Regulation/policy
• Market / Volume

Government
Private sector
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Lenders Risk Analysis Model

• Approvals and Permits
• Technology
• Construction
• Funding
• Market / Demand
• Operational
• Change in Regulations / Law
• Force Majeure

Rule of Thumb Lenders will accept and price
risks they can adequately assess and/or the
Borrower can adequately manage
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Typical PPP/PFI Finance Structure

• The finance structure depends on the level of
  risk in the Project.
• Loans to the project company can be structured on
  a limited recourse basis
• Lender will assess whether debt can provide for
  the majority of the capital requirements of the
  project.
• Debt repayment will be significantly tied to the
  performance on the Project
• A higher level of gearing typically reduces the
  overall cost of the Project

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Risk Allocation and Finance Structures

• Lender will undertake extensive due diligence to
  measure risk implicit in the repayment mechanism
  
• Lenders acceptance of risk allocation will be a
  function of the factors which affect predictable
  cashflows over the concession life
• Key risks which may not appropriately transferred
  to the private sector include
• Political/Policy Risk
• Long Term New Technological Risk
• Market / Volume Risk
• Inappropriate risk transfer to the private sector
  may lead to
• Lower gearing
• Higher Pricing
• Shorter Tenor

Risks not well managed by private sector. Higher
risk of project failure
Higher Overall Cost to Government
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Case Study - Infrastructure - AsiaWorld Expo

• Contractual Structure

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Case Study - Transport - Western Harbour Crossing

• Contractual Structure

Western Harbour Tunnel Company Limited
(CHT, China Merchants, CITIC, Kerry)
Project
Western Harbour Crossing
Awarding Authority
Hong Kong SAR Government
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Case Study - Transport - Western Harbour Crossing

• Project Description
• Design, build and operate a dual three lane
  tunnel crossing linking Kowloon to Hong Kong
  Island
• 100 private sector financing
• Automatic toll adjustment mechanism
• Challenging legislative process
• Size
• HK5.2bn (of HK7.5bn)
• HSBC Role
• Advisor and Arranger to private sector consortium

Western Harbour Tunnel Company Limited
(CHT, China Merchants, CITIC, Kerry)

Project
Western Harbour Crossing
Awarding Authority
Hong Kong SAR Government
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Key Financing Issues in PPP/PFI Projects
Macro
Micro

• Legal regime which permits taking of security and
  enforcement of contractual rights
• Govt obligations undertaken by appropriate
  entities
• Political Commitment to PPP and to specific
  projects
• Competition and availability of participants
• Availability / capacity of long term debt markets
• Availability and establishment environment of
  equity participation
• Transparent procurement process

• Well defined projects, clarity on output spec
• Strong and experienced contractors
• Appropriate allocation of risk reflected in
  payment regime
• High quality predictable cash flow low
  volatility
• Alternative suppliers
• Ability to step in
• Adequate termination protection
• Protection from other adverse events, change in
  law, force majeure, insurance etc

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PPP and Financing Implementation Process
Procurement

• Identify the requirement
• Initial feasibility and assessment of value to
  Government - PSC
• Initial prequel and expression of interest
• Request for proposal
• Review and evaluation of submissions
• Negotiations and selection of preferred bidder
• Negotiation with preferred bidder
• Commercial close

Involve industry private sector?
Financing Process

• Obtain financing proposals
• Due diligence
• Insurance
• Technical/Environmental
• Financial
• Commercial
• Legal Due Diligence
• Documentation
• Syndication of loan
• Financial Close

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Thank You