1 European Commission Second International Workshop on PPPs

1 European Commission: Second International Workshop on PPPs 5 July 2004

2 Who is Skanska ? • Multinational Construction Company • Total annual revenues of 18 Billion USD in 2003. • Over 81% of revenue is international. • Over 69 000 employees. • Consistently named to Forbes' A-List of World's Best companies. • Ranked #1 in Fortune Magazine's 2002 World's Most Admired Companies listing in Engineering, Construction category. July 2004

3 Skanska BOT Business Sectors Skanska BOT AB, a development and investment company specializing in private infrastructure projects in following business sectors. UK PFI: s – the concept being spread to rest of Europe Roads – number of cars/inhabitants increase Power – energy capacity increase necessary for development Ports – Seaborne traffic grows 2*GNP Airports –similar pattern as ports July 2004

4 What does the private sector expect from PPPs? July 2004

Expectations 5 The Industry requires, in order to invest in BOT/PPP projects. • A viable investment that stands alone • Generate construction works and service • Gaining operational knowledge in interesting sectors • Long term stable revenue flow – interesting for long-term owners • Stock market appreciation July 2004

Expectations 6 Political/administrative decisions • general project scope – size and content • tolling or not / cash, electronic or free flow • rate regulation or not • interoperability of tolling systems • other performance criteria • traffic risk sharing mechanism • financial risk sharing mechanism • concession period and transfer mechanism • legal framework • financial award critera • the political commitment to follow through July 2004

Expectations 7 Skanska’s different roles in BOT/PPP projects • Developer • Contractor - normally a 33 -100% stake • Investor - normally a 20 -50% stake • Facilities manager July 2004

Expectations 8 BOT/PPP is relationship management • Contractual • Partner • Client • Service providers • Lenders and lawyers • Economic and financial If we do it well we mitigate risks- We create Value for Money July 2004

Expectations 9 Expectations that we perceive Governments have on the investor/contractor § Fixed price, time certain. PPP is not a claim business § We are not just a builder any longer § In PPP construction is only one element out of several § We sell a service/solution – not a building or a road § We must understand the clients needs and objective § We take complete responsibility for cost, quantities and time with penalties should we fail to deliver § We must look at our work from a lifecycle perspective § We must develop our industry and design with Life Cycle Thinking July 2004

Expectations 10 Expectation of procurement § Pre Qualification – Reasonable number of bidders § Performance specification of a service – not a quantity specification of an asset. § Transparency in the procurement § Confidentiality and intellectual property § Balanced Bidding costs § Openings for unsolicited proposals July 2004

11 What are the lessons learned in PPPs by Skanska? July 2004

Lessons Learned 12 The perfect financing option • There is NO ONE solution • Project specific features are important • You will be caught if you make a short-cut • Optimize rather than maximize • A robust structure is better than rocket science • Approximately right rather than exactly wrong July 2004

Lessons Learned 13 Why BOT/PPP/PFI is a success • Save money when looking at LCC • Possible to realize earlier • Easier procurement – international tender • Faster execution • Known maximum cost, no cost overruns • Access to investments earlier will boost economy • Off Balance sheet • Alternative to conventional way July 2004

Lessons Learned 14 Keys Reasons for Failure • Project not commercially viable if the state does not make it feasible for the investor “Value for money” • Government abandons the Project • Failure in the Consortium - Disagreement between parties - Changed priorities - Economy • Public disapproval • Mismatch in expectations between public and private sector • Wrong risk allocation – right part to carry the risk. Don´t push all risk down excessively - not financiable July 2004

Lessons Learned 15 UK’s National Audit Office published a report on PFI on 5 February 2003 Improved Project Delivery Non PPP Procurement (1999 Survey) PPP Procurement (2002 Survey) Price Overruns 73% 22% (mostly client changes) Time Overruns 70% 24% (only 8% > 2 months) July 2004

16 Where are the obstacles in the public sector? July 2004

Opponent opinions on BOT/PPP- and comments thereon 1(2) • But with enough size and right structure good value for money Gives wrong priority of projects - • Very often these deals attract international contractors using local companies as subcontractors Costly and complex transaction - • But different risk distribution gives lower overall cost Only large contractors are big enough to compete for these projects - • 17 Interest rates and equity returns more expensive than government bonds - • Obstacles It is the politicians not the private sector who decide priorities, irrespective of traditional or BOT/PPP procurement Commit our children - But is it wrong to spread the project cost over the economic life time of the facility being normally 20 -40 years ? July 2004

Obstacles 18 Opponent opinions on BOT/PPP – and comments thereon 2(2) • Our country cannot afford a new project - Casualties go down on motorways - political responsibility? Pollution in congestions higher than traffic flow Operational costs lower in modern buildings than old Transport infrastructure stimulate regional development Infrastructure development drives economic growth • Testing new concepts will improve effectiveness of public as well as private sectors - Is it political responsibility to do nothing or not to try changes? July 2004

19 Value for Money (Vf. M) Assessment Value/ “price” Conventional Procurement PSC PFI Procurement Vf. M Risks retained by Public Sector Cost of finance Whole life cost of procuring services July 2004

20 To conclude. . - BOT/PPP is like a marriage • You flirt, fall in love and enter into contract • Hopefully a long duration • Quality of service depends on maintenance • Objectivity and rational not always ruling • There are good and bad times • Recourse to lawyers in case of dispute July 2004

Skanska BOT investments Nelostie Motorway Project, Finland 21 North-South Highway, Chile Maputo Port, Mozambique Bridgend Prison, UK Ponte de Pedra Hydro, Brazil Breitener Energy Plant, Brazil Kings College Hospital, UK Walsgrave Hospital, UK Derby Hospital, UK St Petersburg Waste water, Russia July 2004 Orkdalsvegen, Norway Bexley Schools, UK