HIGHWAY PPP

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HIGHWAY PPPS, WHY AND HOWEnrique Fuentes,
Development Director Ferrovialand Member of the
Board of European International
ContractorsSeminar on legal, economic
implementation issues on PPPsMinistry of
Economy, Poland, and World BankWarsaw, April
2007
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About EIC PPP experience

• European international contractors take a leading
  role in developing the worlds TRANSPORT
  infrastructure, such as toll roads, tunnels,
  railroads, ports and airports.
• The 15 of the Top 35 Transportation Developers
  2006, which are associated to EIC, have
  implemented 269 PPP projects since the year
  1985, whilst in 2006 they had 228 projects under
  active proposal.

Warsaw, 18 June 2008
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About EIC Statistics
With an aggregated international turnover in 2006
of almost 112 billion , European international
contractors are the most important players in the
international construction business.
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WHO WE ARE FERROVIAL
MKT Cap US 8 bn

• Heathrow
• Gatwick
• Stansted
• Glasgow
• Edimburgh
• Southampton
• Others

MKT Cap US 7 bn

• Poland (59)

• Texas

• Spain

• London underground
• World largest handling

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WHO WE ARE CINTRA
7 Bn market cap 22() concessions More than
2,500() Km of toll roads
65 of the value in North America Present in
7() countries 73() years average concession
life
Ireland Eurolink Motorway M-3
Canada 407 ETR
USA Chicago Skyway Indiana Toll Road Segments
56 SH130
Spain Ausol I M-203 R-4 M45 Ocaña-La
Roda Autema Ausol II
Chile Collipulli Temuco Santiago
Talca Temuco Rio Bueno Talca
Chillan Autopista del Bosque
Portugal E. Algarve Norte Litoral Scut Açores ()
Greece Ionian Roads Central Greece
( ) Including the Scut Açores stake via
Ferrovial Infraestructuras. There are also three
projects pending final award Mantua-Cremona
(Italy), Central Greece (Greece) and SH-121
(USA) () Based on internal valuation released
to the market in December 2006 () Projects
pending final award.
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PPP FORMULAS RISK TRANSFER

• Risks transferred to concessionaire under
  different PPP formulas
• After Eurostat ruling 11/2004, all of them are
  off balance sheet for Governments
• but key criteria should be who pays for the
  infrastructure

Formula Demand risk OM risk Construction Land Acquisition Financing
Classic Concession User paid toll Yes mitigation possible if risk too high (ie new mkts or no toll culture) Yes Yes Depends on country. Normally no except Spain and, partially, Portugal Yes mitigation in emerging markets)
Shadow tolls Partial Yes Yes Depends on country. Normally no except Spain and, partially, Portugal Yes mitigation in emerging markets)
Availability schemes No Yes Affects not only costs but revenues Yes Depends on country. Normally no except Spain and, partially, Portugal Yes mitigation in emerging markets)
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WHY PPPS SERVICE (CUSTOMER RATHER THAN USER)

• Incentives in a PPP are fully focused on
  providing a public service in the most possible
  efficient way, especially if traffic risk (and
  upside) is transferred
• Torontos 407
• Better and proactive winter maintenance in
  Torontos 407 increases capture rate in bad
  weather periods
• Capacity is increased well ahead of contract
  obligations in Torontos 407, improving driving
  conditions and attracting more customers
• Chicago Skyway
• Electronic tolling implemented in six months
  (after 30 years of city ownerhip)
• Queues reduced from hours to minutes
• Madrid Levante Highway (Spain) incentives
• 4 year extension in the original concession term
  depending of its performance in certain criteria
  capture rate of heavy traffic, accident rate,
  congestion levels, and traffic flow, queues at
  toll plazas, pavement surface conditions
• Awarding criteria linked to discounts offered to
  customers
• BUT THIS ONLY WORKS IF THE PRIVATE DEVELOPER
  HAS MONEY INVESTED AND RISK AND UPSIDE TRANSFERRED

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WHY PPPS EFFICIENCY INNOVATION

• Deliver the most efficient infrastructure that
  serves public needs
• Construction focus on value engineering and early
  delivery
• Stop to cost and delay overruns
• Focus on Life Cycle costs, rather than initial
  construction costs
• Optimisation of opex / capex balance
• Management of ongoing capex
• Development of new technologies for better
  service / enhanced revenue
• Free-flow tolling
• Congestion / accident detection systems
• Toll plaza queues Toll Flow technology
• Automatic anti - icing

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WHY PPPS DELIVERABILITY

• Boosting economic development, relieving
  congestion, and reducing greenhouse emissions
• Spanish highways in the 60s and 70s
• Chilean highways in the 90s
• Portuguese highways
• Irish highway programme
• De- bottlenecking the system and providing
  mobility in congested areas
• 407ETR highway in Toronto was developed 20 years
  ahead of the expected horizon for public funding
  development thanks to the involvement of private
  developers
• Providing crucial future infrastructure for the
  long term development
• Trans Texas Corridor

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WHY PPPS RATIONALITY OF DECISION MAKING AND
RESOURCE ALLOCATION

• Private involvement in the development of
  transport infrastructure brings discipline and
  rationality to the political decision process
• PPP projects solving actual, critical traffic
  problems are the most financially feasible
• Private funding used in projects capable of
  generating predictable revenue
  government funding focused on pure development
  projects
• Natural tendency to invest where investment is
  more needed
• Contract with a 3rd party allows to avoid
  political review of tariff setting
• Where Government retains control of tariffs, they
  seldom end up reflecting real cost of service US
  turnpikes
• Ensures accountable development of
  infrastructure, not subject to budgetary
  constraints
• Ongoing maintenance and future capex

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WHY PPPS COMPARISON WITH TELECOMS
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PPP FORMULAS BIDDING SCHEMES
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PPP FORMULAS WHERE
Risk transfer
USA
Germany
Ireland
Canada (privatizations)
France
Classic concession
Greece
Italy
Spain (ENA)
Spain (Central Govt)
GBR (new?)
Portugal
Spain (OM)
Shadow tolls
Finland
Spain (Regions)
GBR
Holland
Availability schemes
Canada (Quebec)
Bidding scheme
PFI
Auction
Tender
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PPP FORMULAS CONCLUSIONS

• Governments with more PPP experience moving
  towards user paid schemes demand risk transfer
  and towards simpler bidding schemes
• Governments with less experience moving the
  opposite way availability and PFI bidding
  schemes
• Drivers
• Risk cost reduction as long as it is off
  balance sheet
• Ensure acceptability of the contractual framework
• Beware experience and government structure are
  key for the dialogue process being efficient and
  objective (not every Government or legal system
  is like the UK)
• A balance should exist between the formulas
• The key should be
• Risk transfer efficiency brought in by the
  Private sector rather than Government budget
  constraints
• Bidding scheme if there is no track record,
  efficiency (cost) and comparability of the
  offers, rather than extensive negotiation
• . BUT, WHATEVER YOU DO, DO IT NOW!,
  INFRASTRUCTURE IS NEEDED

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PPP FORMULAS LIKELY EVOLUTION

• Short / Medium term
• Surge of PFI schemes for off balance sheet
  reasons
• Minimum risk transfer minimum cost
• Limitation of concessionaire upside
• Initially developed by contractors, later sale to
  financial investors
• PFI main limitation government future payment
  commitments
• Budgetary constraint today is accounting,
  tomorrow will be financial
• Key risk transfer trade off in the long term
  efficiency vs cost
• Long Term
• Classic user paid concessions for low medium
  risk projects
• Funds raised or saved are then devoted to higher
  risk projects
• Possible transformation of PFIs in user paid
  schemes
• Driver for PFIs efficiency of private sector
• Likely bias towards projects with a significant
  recurrent cost component

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HOW TO ATTRACT INVESTORS BALANCED DEAL?

• How can an Administration attract investors?
• Long term deal goes through different
  legislation sessions, politicians, economical and
  social environments, economic cycles.
• All equity and debt are invested upfront and are
  unmovable. Assets belong to the State. Private
  sector is left there to rely on a piece of paper
  relies on its enforceability.
• Private sector control on the investment is very
  limited. Service can not be interrupted, toll
  setting mechanism is stipulated, most service
  levels are fixed.
• Penalty for default is normally the loss of the
  investment for the shareholders and all or most
  of the debt for the lenders.
• Odds are that future legislators will support the
  Admin side rather than the private views.
• Can an Administration behave and promise to
  behave as an equal partner in a (very) long term
  Agreement?

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HOW TO ATTRACT INVESTORS ADEQUATE STABLE
LEGISLATION

• Adequate legislation not only for the concession
  in itself, but also for ancillary (but key)
  agreements
• Financing no limits to foreign lending or to
  step in rights for lenders
• Land acquisition has to be predictable in cost
  time adequate title to land
• Ownership of the asset / contract no limits to
  nationality or nature
• Types of legislative changes with effects that
  should be protected or compensated
• discriminatory legislation
• Tax legislation that alters the financial balance
• legislation that affects an essential right in
  the Agreement
• Compensation should be calculated based on
  effective damage (loss of future value)
• Compensation based on forecasts
• Present value
• Possibility Independent calculation

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HOW TO ATTRACT INVESTORS COMPETING INFRASTRUCTURE

• Admin should be able to implement virtually
  anything but must compensate for certain
  damages
• Fair and balanced provisions relating to
  competing facilities the private sector assumes
  a reasonable and defined amount of risk, but it
  is not unfairly burdened by an unanticipated
  source of competition
• Examples of competing facilities that would not
  generate compensation
• Those specifically planned in the concession date
• Improvements in nearby facilities due to reaching
  certain congestion levels
• New or improved facilities that do not cause
  material negative impact to Developer

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HOW TO ATRACT INVESTORS ROAD STANDARDS

• Safety and design
• Specify clear design rules and standards and
  let private sector to optimize
• Developer must adhere to future safety specs
  but in a fair and non discriminatory manner
• Substantial changes that affect the nature of the
  asset should be negotiated
• Policing and rules as in any other similar
  road.
• Signs, lights, speed, Traffic Code
• Patrolling, fines, surveillance
• Traffic Management

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HOW TO ATTRACT INVESTORS ELECTRONIC TOLLS

• Need for State authority to define and enforce
  interoperability rules
• For State Agencies and Private Operators
• Recognize different agents issuers and operators
• Technical standards for transponder issuers
• Technical standards for road operators
• Basic interoperability rules (interfaces,
  transponder lists )
• Enforceability and costs
• It is invented but seldom applied

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HOW TO ATTRACT INVESTORS ENFORCEABILITY

• Of the Agreement
• Are both parties subject to the Law and the
  Courts? (Sovereign Immunity?)
• Appropriations to pay compensations
• Independent dispute resolution method third
  party valuation
• Recourse to Justice by any party
• Effectiveness of decision
• Independent justice system (local or foreign)
• Of the tolls
• Legal standing of the Concessionaire
• Access to data (plate owner, address )
• Enforceability within state or region

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HOW TO ATTRACT INVESTORS TOLL RATES

• Method to be established at time of agreement
• Negotiated approach works were concessionaire is
  public or semi public (France, Italy), or were
  there is a long track record (UK)
• Objective method must not be subject to
  legislative or administrative decisions
• May consider CPI or per capita GDP to keep up
  with long term cost of goods
• Can be related to congestion levels
• Many possible parameters can help achieve
  transportation objectives
• Peak hour tolls, night time rates, congestion
  tolls
• Truck / car differentials
• Premiums / deterrents to specific customers high
  occupancy, extra heavy, local residents (but
  beware of fraud!)
• If tolls want to be kept low, it can be specified
  in the agreement upfront

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HOW TO ATTRACT INVESTORS TERMINATION

• Termination for Default
• Administration Default must compensate the
  investors, ensure payments, get control when
  paid.
• Developers Default first right of lenders to
  cure, then step-in of Administration.
• Termination for convenience (of the Admin)
• Investors should be compensated as per
  Termination for Administrations Default
• Formula to calculate compensation must be fixed
  in Contract. Should compensate for loss of value.
  Third party valuation under fixed set of rules
• Beware of situations where it limits upside
  without covering downside

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HOW TO ATTRACT INVESTORS DOS AND DONTS

• Main decisions taken and in force by the time of
  the tender and politically supported
• Be aware of political timing concessions and
  even tenders can outdate election periods
• Be aware of hurdles in your legislation is it
  ready for the deal?
• If not, implement the necessary changes
  beforehand
• Understand cost for the taxpayer of each
  condition you feel you have to ask for
• Be as flexible as your environment allows to hear
  proposed improvements from prospective bidders
• Avoid subjective decisions will scare
  competition and certainly devaluate the deal
• In lack of proven track record, extra care on
  legislative / enforcement framework
• Get ready ahead of time and have a dedicated team
• Feasible projects take time to develop before
  they can be tendered

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EIC White Book on BOT/PPP Recommendations

• 3 TENDER PROCESS
• Use Pre-qualification of bidders
• Ensure Transparency Confidentiality throughout
  process
• Present clear award criteria
• Reimburse Bidding Costs
• Unsolicited Bids ??? (outside EU )
• 4 RISK MITIGATION
• Provide for optimal risk identification
  allocation
• Invite financial risk mitigation through IFIs,
  ECAs, etc.

• 1 GENERAL PRECONDITIONS
• Ensure true Government Support
• Create a PPP Task Force
• Enhance Country Legal Framework(Accounting,
  Taxes, Procurement)
• 2 PROJECT PREPARATION
• Put in place sound procurement strategy
• Present comprehensive, reliable project
  documentation
• Provide for a steady and secure payment mechanism
• Agree on affordable level of tariffs

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