New Zealand Transport Agency and NZIHT 9th Annual Conference

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New Zealand Transport Agency and NZIHT 9th
Annual Conference Improving the Road Network
Right Price, Done the Right Way, at the Right
Time Road Infrastructure Financing For Safe,
Reliable and Affordable Transport 12 14 October
2008 NAPIER NEW ZEALAND Nazir Alli
379701
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Needs To Be Addressed

• ? Decaying infrastructure services
• ? Poor service delivery
• ? Meeting basic needs
• ? New infrastructure services
• ? Inability to obtain finance for capital
  investments

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Financing

• Government
• Traditionally
• Social goods
• Nominal cost recovery

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Private Sector (?)

• Fear
• Natural monopoly
• Payback period
• Political risks

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Options

• Service Contracts - limited benefits
• Management Contracts
• Concessioning - the first step to private
  participation
• BOT, BOO etc - direct private involvement
• Divestment - another route to full-fledged
  private participation

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Allocation of Responsibilities
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(No Transcript)
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Selecting Option

• Government objectives
• What needs addressing?
• What will government do?
• Countrys attractiveness to private investor

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Why PPPs?

• ? Financing requirements outstrip resources
  available from tax-based revenues
• ? Government negotiates investments through
  diverse sources through private sector
• ? Cost effective and appropriately adapted
• ? Improvements and preservation beyond MTEF
  horizon

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Considerations

• ? Compare the results of PPP process with public
  sector ownership
• - BUT use an appropriate private sector cost
  of funds in governments instance
• - look to market comparables
• ? If private sector assumes real risks, it is
  impractical to hold private sector to government
  cost of funds

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Considerations (Cont.)

• ? Extra Cost of private financing is what
  government is paying to off-load project risk
• ? Procurement analysis must ask the question
• - Is government being charged the right price
  to off-load these risks?

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Relative Cost of Funds

• ? What do the public and private cost of
  financing reflect?
• ? Government bond financing
• - rates reflect the risk that government will
  not be able to tax citizens to extent needed to
  cover outlays i.e. its power to tax

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Relative Cost of Funds (Cont.)

• ? Private sector financing
• - rates reflect the capital markets judgment
  as to the riskiness of investing in the debt
  and equity securities of the project i.e.
  projects or companies
• ? Risk of project exist
• no matter who owns it!

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Challenge

• ? Determine optimum mixture of public and private
  resources
• - optimum method of providing a public good at
  acceptable levels of quality and price
• ? Determine if public sector can deliver service
  (manage risk) at lower cost than private sector

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Risk Regime

• ? Traffic
• ? Financial
• ? Political
• ? Pre-development
• ? Construction
• ? Operation
• ? Commercial
• ? Legal
• ? Societal concerns

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SOCIETAL CONCERNS

• - Income transfers
• - Environmental problems
• - Attitude towards taxation
• both by government and
• citizens
• - Role of government

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Typical Project Structure
Sponsors
Loan Security
Equity investment
Financiers
Government (the grantor)
Project Company (SPV) (Concessionaire)
Concession
Roads Authority
Toll Road
Construction contractor
Operation and maintenance contract
Operator
Construction contract
Adapted World Bank 1997
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Constraints Complexity
Independent
Engineer
Concessor (State)
Engineer Agreement
Insurance providers
Concession contract
Contractor JV
Project Insurance
Construction contract
Operation contract
Subscription agreement Shareholders agreement
Loan Agreement
Equity Investor
Operation Company
Bank Lenders
Lenders Technical Adviser
Typical Structure
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Constraints (Cont.)Objectives of parties
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Predevelopment Period Risks

• Period ?Conception to financial closure
• Feasibility Studies
• - detailed and realistic
• - financially viable
• - socially acceptable

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Predevelopment Period Risks (Cont.)

• Permits
• - environmental
• - zoning
• - tolling

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Construction Period Risks

• Focus
• - complete on time
• - within budget
• - according to specifications

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Construction Period Risks (Cont.)

• Breach of Contract
• - main Contractor
• - sub-contractors
• - equipment suppliers
• Remedies
• - Performance bonus
• - Phased payment
• - Guarantess

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Construction Period Risks (Cont.)

• Delays
• - change in scope
• - weather
• - poor performance

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Construction Period Risks (Cont.)

• Cost Overruns
• Finance
• - project sponsor
• - equity participants
• Remedies
• - fixed price turnkey
• - completion guarantees
• - standby letters of credit
• - security interests

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Construction Period Risks (Cont.)

• Force Majeure
• Lack of Adequate Infrastructure
• - remoteness of site
• Remedies
• - Builders all risk insurance
• - Negotiable buyout (political risk)

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Operational Period Risks

• Political Risks
• - changes in legislation
• - inaction of government
• - materially adverse government action
• Remedies
• - Insurance
• ? MIGA
• ? private companies
• - Government as equity partner

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Operational Period Risks (Cont.)

• Legal Risks
• - access to courts
• Remedies
• - Governing law provisions
• - Arbitration provisions
• Related Party risk
• - special purpose vehicle

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Operational Period Risks (Cont.)

• Non-payment of debt
• - lenders
• - equity participants
• - exchange differentials
• Remedies
• - Reserve funds
• - Currency swaps

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Operational Period Risks (Cont.)

• Market risk
• - access to local financial markets
• Management Capability
• - operator (OM contracts)
• Force Majeure

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• LESSONS LEARNT
• ?Not all Roads can be Concessioned
• No Free Roads - The User Pay Principle is the
  Most Equitable Means
• Of Road Funding
• Utilise Internationally Recognised Best
  Practices
• Strengthen In House Experience - Be Hands On
• Work From an Established Platform
• Do Not Rush the Process
• Be Transparent
• Get Public Buy In
• Set Clear Outcome Parameters -Engineering
• -Environmental
• -Entrepreneurial Development
• Strict Law Enforcement
• Introduce a Highway Usage Fee (Huf)

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Conclusion

• Transparent process
• Demonstrate value for money
• Balance
• - risk
• - reward
• Risk allocated to party best able to manage and
  mitigate

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THANK YOU

www.nra.co.za