Experience with PPP in transport infrastructure: The view of advisers Success factors, market overview and best practice Erich Thewanger November 2010

Experience with PPP in transport infrastructure: The view of advisers Success factors, market overview and best practice

Erich Thewanger

November 2010

CORPORATE FINANCE

ADVISORY

© 2010 KPMG Advisory GmbH, the Austrian member firm of KPMG International, a Swiss cooperative.All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International. 2

Contents

Experience with PPP projects

PPP projects worldwide

Market Experience

Levels of Satisfaction

Success factors of implementing PPPs

Success story Hungary

© 2010 KPMG Advisory GmbH, the Austrian member firm of KPMG International, a Swiss cooperative.All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International.

Experience with PPP projectsBenefits for the Public Partner – PPP projects Worldwide

3

PPP projects 2009 key facts The number of PPP projects that were closed in 2009

shrank to a total of 154 projects compared to 180 projects in 2008.

The total deal volume of the primary PPP market decreased by 32% to US$ 45.5 billion in 2009.

The main contract types were: Design-Build-Finance-Operate contracts (DBFO), Design-Build-Own-Operate contracts (DBOO) and Build-Operate-Transfer contracts (BOT).

Most of the PPP deals are within a capital range of US$ 100 million to US$ 500 million or below US$ 50 million.

PPP projects by region PPP investments are still dominant in Western Europe

but volumes suffered a huge decline in 2009 compared to 2008, losing 53% of the capital volumes seen in 2008.

UK is the most advanced PPP user in the world – its share is almost 1/5 of the global PPP market. It remains the largest market for social infrastructure, especially education, healthcare and waste management projects.

Projects in Eastern Europe, Latin America and the Subcontinent increased due to large transactions that closed in those markets.

Source: Infrastructure Journal “PPP/PFI Outlook 2010”, 2010

PPP Projects by region

Contract Types for Global Primary PPP Market


Experience with PPP projectsBenefits for the Public Partner – PPP Projects Worldwide

PPP Market by sectors The size of the transport sector reached US$ 28

billion in capital value in 2009. There was substantial demand for social

infrastructure projects in 2009, mostly driven by education, waste/ recycling, housing and street lighting.

In total, 91 projects were financed in 2009.

PPP Projects - Source of funding European banks have acted as primary lenders to

project finance. Still, commercial lending is not sufficient in the

current market conditions. Banks have adopted a more selective approach.

The availability of long-term loan finance has depended upon the investors' understanding that the risks attached to interest payments and loan repayments are adequately reflected in the interest rate they offer.

To fill the gap in funding, capital markets should be revived.

Pension funds, institutional/private investors and other new equity sources need to be tapped to co-finance projects.

Source: Infrastructure Journal “PPP/PFI Outlook 2010”, 2010

PPP Market by sectors

PPP Projects – Source of funding

0

5

10

15

20

25

30

35

40

45

50

55

60

65

70

75

2006 2007 2008 2009

US$bn

Bonds Equity Loans Grant/subsidy


Experience with PPP projectsBenefits for the Public Partner – Market Experience

Germany The steering committee for PPP in public building construction at the German Federal Ministry of Transport, Building and Urban Affairs (BMVBW) commissioned a wide-ranging review. A group of 46 projects already realized were re-examined as part of the review, the findings of which include the following: Costs were 20% lower than with conventional planning Significantly lower cost overruns Projects were between six and twelve months faster Efficiency gains in the operation phase

National Audit Office research results The UK’s NAO established that the PPP projects

(lifecycle model) completed so far had achieved cost savings of 17% as compared with conventional realisation

The NAO also identified highly significant benefits in these projects in the area of compliance with cost and time specifications:Project involving Conventional PPP

Delayed completion

73% 22%

Cost overruns 70% 24%

Source: National Audit Office

Source: BMVBW

HM Treasury key findings of 61 PFI projects 89% of projects were delivered on time or early; All PFI projects in the HMTreasury sample were

delivered within public sector budgets; No PFI project was found where the unitary

charge had changed following contract signature – other than where user requirements changed; and

77% of public sector managers stated that their project was meeting their initial expectations.Source: HM Treasury, 2003

UKResearch studies by the National Audit Office (NAO) and the HM Treasury discovered:


Experience with PPP projectsBenefits for the Public Partner – Levels of Satisfaction

Key findings about the level of satisfaction of PPP projects in England

96% of the contract managers were satisfied about the overall performance of PPP projects in the last 12 months.

The majority of the contract managers (94%) reported that the contract service levels were achieved.

92% of contract managers who have carried out user satisfaction assessments reported that services were being delivered to an acceptable standard.

Online survey of PPP contract managers across England

Survey was addressed to 418 contract managers of operational PPP Projects in England during 2008.

151 surveys were completed (36% response rate).

Source: Ipsos MORI report “Investigating the performance of operational PFI contracts” , 2008

Relationships between the public and private sector teams

83% of the contract managers rate the day-to-day operational relationship between the public and private sector contract management teams over the past 12 months as either very good or good.

Four in five contract managers (83%) have never used the formal dispute mechanism since the PPP project became operational.

© 2010 KPMG Advisory GmbH, the Austrian member firm of KPMG International, a Swiss cooperative.All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International.

Key factors of success include:

Careful planning of the PPP project

Solid revenue and cost estimate

User willingness to pay and communication plan

Extensive feasibility study with use of PPP experts

Competitive and transparent procurement

Well balanced and bankable contracts and agreements, in particular

regarding

Distribution of risks

Payment mechanism

Termination regulations

Appropriate Legal and Regulatory Framework

Strong institutions with appropriate resources dedicated to a project

7

Success factors of implementing PPPs Factors of Success


PPP experience around the globe and market update Success story Hungary: History

With this roads program Hungary achieved to extend its road network considerably.

In the period 1990-2005 Hungary doubled its motorway and expressway capacity – from 349 to 780 km. The vignette system applies to a total of 677 km of the Hungarian motorway network.

The European Bank for Reconstruction and Development (EBRD) provided its first ever motorway PPP loan in Hungary in 1993. By the end of 2005, the EBRD had provided EUR 327 million to private companies participating in the construction of three PPP motorways in Hungary, where the total costs of the projects were more than EUR 2 billion.

M1 First real toll motorway tendered and implemented in Central and Eastern Europe (construction

finished in 1995 on schedule and within budget). Traffic volumes were about 40% lower than anticipated, high toll rate did not cover for low

volume. The concessionaire was unable to service its debt and ultimately the government had to take

over the concession.

M5 DBFO contract for section 1 signed in 1994 as a real toll motorway. The contract was amended in 1995 with a minimum revenue guarantee due to which the

government paid significant amount of warranty to cover the losses until 2004. In 2004 the state bought 40% of the concessionaire’s equity, and agreed to substitute its toll

and warranty revenue with availability payments. In 2005 section 2 of the M5 was opened (46 km) and in 2006 section 3 (15 km), both as

availability schemes.

M6 After the invitation for tender for section 1 in Feb 2004 these first 58 km were opened to the public

in 2006 and 2 years later, in 2008, 11 more km, the section 2, was opened for operation. Section 3 is in Financial Close stage.

Source: DG REGIO Open days, October 10, 2006

M5

Section Opened

1 1998

2 2005

3 2006M6

Section Opened

1 2006

2 2008

3 Financial Close Stage

M1

Section Opened

1 1995


PPP experience around the globe and market update Success story Hungary: Reasons

After the lessons learned from the first projects, Hungry achieved to

implement:

Careful planning of the PPP project

Solid revenue and cost estimate

User willingness to pay and communication plan

Extensive feasibility study with use of PPP experts

Competitive and transparent procurement

Well balanced and bankable contracts and agreements, in particular

regarding

Distribution of risks

Payment mechanism

Termination regulations

Appropriate Legal and Regulatory Framework

Strong institutions with appropriate resources dedicated to a project


PPP experience around the globe and market update How the success story came to a sudden end

What you should never do with your PPP market:

M3/ Hungary:

Cancelled ten days before reaching LAFO stage

A3/ Romania:

Awarded three times; still not under construction

D1.1/ Slovakia:

Awarded

Cancelled prior to financial close

D3/ Czech Republic

Has been announced several times since years


Contact

Erich Thewanger, Partner

Tel (KPMG): +43 1 31 332 - 536

Mobile: +43 664 304 6012

Fax (KPMG): +43 1 31 332 - 459

[email protected]

Documents

Experience with PPP in transport infrastructure: The view of advisers Success factors, market overview and best practice Erich Thewanger November 2010