Developing by Public Private Partnership PPP Risks challenges
Developing by Public Private Partnership (PPP): Risks & challenges for private developers/ investors’ participation. Vicky D. Kefala MBA Finance, BA Economics Head, Investments & Development Projects Consolidated Contractors Company (CCC) PRESENTATION – DEC. 2015
Developing by Public Private Partnership (PPP): 1. Definition, Characteristics, Structure 2. PPP in Various Sectors 3. Risks & Evaluation Challenges 4. Major Players in PPPs 5. Conclusions & closing remarks Project Data & Charts throughout Vicky D. Kefala, BA Econ. , MBA Finance
Public Private Partnerships – What are they? PPP PFI P 3 • A collective name for projects carried out between public bodies and private companies • The Public Sector defines the output specifications for an asset and /or a service and the Private Sector delivers them • An alternative way of funding projects by bringing private finance to public sector projects Vicky D. Kefala, BA Econ. , MBA Finance
PPPs -Main Characteristics • An arrangement between public and private sector whereby the private entity implements a project (asset & service) according to specifications • Assuming the risks and receiving the benefits (payments and/or revenues) for a significant period of time • Αppropriate allocation of resources, risks, rewards, responsibilities and obligations -> CONCESSION AGREEMENT 4 Vicky D. Kefala, BA Econ. , MBA Finance
Typical PPP Structure Public Sector (ministry, municipality, national road company) Partnership Agreement (DBFM) Equity Shareholders Agreement Special Purpose Vehicle (SPV) Design & Construction Agreement Contractors Financing Agreements Funding Banks, Multilaterals (EBRD, Development Banks) Operating (or Facility Management) Agreement Service providers (Operator or Facility Manager) 5 Vicky D. Kefala, BA Econ. , MBA Finance
PPP SECTORS Transport & Infrastructure • Motorways Attiki Odos • Bridges • Tunnels • Railways • Airports • Ports Rio - Antirrio Fuel, Environment & Energy • Waste Collection • Waste Recycling & Treatment • Wastewater Treatment • Waste to Energy Plants 6 Vicky D. Kefala, BA Econ. , MBA Finance
PPP SECTORS Education • Schools • Universities • University Housing 14 +10 Schools in Attica Health • Hospitals • Treatment Centers 7 Vicky D. Kefala, BA Econ. , MBA Finance
PPP SECTORS Public Order • Police Stations • Fire Brigade Stations • Prison Facilities 7 Fire Stations Greece Defence • Defence Academies • Simulator & Training Facilities Others • Street Lighting • Recreation & Culture • Telecoms 8 Vicky D. Kefala, BA Econ. , MBA Finance
PPPs – Key participation considerations ØCountry / Sovereign • • Ratings (investment grade) Legal / regulatory framework Political –instability, restrictive regimes, war Economic – crisis, inflation, interest rates volatility ØProject • Technical difficulty & characteristics • Contractual documentation (obligations, compensation, relief events) ØSponsor (partners) • Partner companies capabilities, structuring (who is leading where), robustness ØFinancing • Ability to secure funding, terms • Market conditions • Inconvertibility, f/x (country & contractual)
PPP Risks: from start to end Start-up Expenses………. . Investment……………. Dividends…. ……. PROJECT CONTRACTS SIGNING • • Land availability Planning deficiency Poor public-decision making / delays Permit / Approval Risk DESIGN & CONSTRUCTION FINANCING • • • Interest rate volatility Financial legislation change Poor financial Markets Inflation rate volatility Poor market interest of project Inappropriate capital structure • • • Lack of design flexibility Design changes Design deficiency Completion delay Construction Cost overrun Defects / poor workmanship Safety Risk Interest rate volatility Inflation rate volatility OPERATION • • • Legislation change O&M cost overrun Market demand fluctuations Environmental problems Operator inability Public opposition to high prices Safety problems Interest rate volatility Inflation rate volatility TRANSFER • Source: Adapted from Risk Identification & Assessment in PPP infrastructure projects using fuzzy analytical hierarchy process and life-cycle methodology , Jie Li and Patrick X. W. Zou Handover problems
PPP Valuation Challenges Streams of expected, risky cash flows, occurring for a long period in the future (25 -35 yrs) for which there is no absolute comparable Ø Data availability • Large, periodic sample of different infra sectors over their lifecycle • Type of investments financed in the past not representative of today Ø Term structure of expected returns • Dynamic risk profile – discount factors over time- projects have multiple phases • Sequential resolution of uncertainty • Fixed term Ø No unique price • No traded equivalent (infra funds vs developers) • Subjective valuation of an asset by different investors • Project and investor characteristics create an equation with 2 unknowns- no direct solution Source: The Valuation of Privately-Held Infrastructure Equity Investments – Jan 2015 EDHEC-RISK institute
PPP Participation & Evaluation - challenges Ø Strategic, Overall • Fit, synergies • Country, project, partner risks • Financing available Ø Risk Mitigation / Cash Flow reliability • Risks - manage best and for least cost • Insurance – typical construction, business interruption, political • Contingencies Ø Discount Rate, NPV & IRR • What discount rate to use (single rate) • Positive NPV • Free post tax cash flows Source: The Valuation of Privately-Held Infrastructure Equity Investments – Jan 2015 EDHEC-RISK institute
PPPs in EUROPE Projects by Value and Number of Projects EUR billion EUROPE EUR 18. 7 bln vs EUR 16. 3 bln Source: EPEC Market Update 2014 – Feb. 2015 Vicky D. Kefala, BA Econ. , MBA Finance 82 closed vs 80 in 2013 68 in 2012
Europe: PPPs by Sector for 2014 – Value and Projects SECTOR BREAKDOWN 63% in Transport 11. 8 bln 23 projects in Transport Healthcare – 15 deals 14 projects in Education Source: EPEC Market Update 2014 – Feb. 2015 14 Vicky D. Kefala, BA Econ. , MBA Finance
Public Private Partnerships (PPPs) Major Players Μajor corporate, funding and advisory entities: 1. Construction & Development companies 2. Funding institutions (commercial banks, multilaterals, DFIs) 3. Private equity, infrastructure funds 4. Consultants (financial, technical, legal, insurance)
Major PPP Players: 1 - Construction & Development companies Top 10 PPP Transportation Firms Company Country 1. Ferrovial/Cintra Spain 2. ACS Group/Hochtief (US $B) 73. 5 Spain 3. Vinci/Cofiroute France 72. 0 70. 7 4. Macquarie Australia 48. 2 5. Bouygues France 38. 6 6. Egis Projects France 26. 6 7. Sacyr Spain 21. 8 8. John Laing United Kingdom 21. 4 9. Global Via Spain 19. 8 10. OHL Spain 18. 2 Source: Public Works Financing 2013 Survey of Public-Private Partnerships, October 2013
Major PPP Players: 2 - Funding Banks & Institutions LENDING BANKS / LEAD ARRANGERS BTMU State Bank of India China Develop. Bank SMBC Mizuho Korea Develop. Bank Credit Agricole Barclays HSBC ING Commonwealth Bank of Australia Unicredit Deutsche Bank Goldman Sachs Standard Chartered MULTILATERAL / ECAs • JBIC/Nexi • US Ex-Im • Kexim/K-Sure • IFC/MIGA • China Exim/Sinosure • EIB • EKF • SERV • GIEK
Major PPP Players: 3 - Infrastructure Funds RANK FUND NAME 1 Macquarie Infrastructure and Real Assets 2 Brookfield Asset Management 3 Global Infrastructure Partners 4 Borealis Infrastructure (OMERS) 5 IFM Investors 6 Alinda Capital Partners 7 Caixa Economica Federal 8 Korea Infrastructure Investments 9 EQT 10 Steel. River Infrastructure Partners 11 Morgan Stanley Infrastructure 12 Arc. Light Capital Partners 13 Infra. Red Capital Partners 14 JP Morgan Asset Management 15 Citi Infrastructure Investors 16 Goldman Sachs Principal Investment Area 17 Ardian 18 Meridiam Infrastructure 19 Infracapital 20 Kohlberg Kravis Roberts BASED Australia Canada United States Canada Australia United States Brazil South Korea Sweden United States United Kingdom United States France United Kingdom United States Source: Infrastructure Investor, December 2013, p. 30 US$ B $23. 34 18. 48 16. 47 6. 78 5. 85 5. 48 5. 20 4. 61 4. 18 4. 16 4. 00 3. 91 3. 85 3. 48 3. 40 3. 38 3. 16 2. 88 2. 68 2. 41
Major PPP Players: 4 - Consultants FINANCIAL ADVISORS LEGAL ADVISORS TECHNICAL ADVISORS • Ernst & Young • Pw. C • KPMG • Credit Agricole • BNP Paribas • SBI Capital • ΗSBC • BTMU • Rothchild • SMBC • Green Giraffe Energy Bankers Allen & Overy Norton Rose Ashurst Pinsent Masons Hogan Lovells Chadbourne & Park Linklaters White & Case Clifford Chance Trowers & Hamlins • Mott Mc. Donald • Atkins • Fichtner • Babcock & Brown • Arup • Mc. Bains Cooper INSURANCE ADVISORS • Marsh • Jardine Lloyd Thompson • ΑΟΝ
CONCLUSIONS • Concession model recognizes the role of private sector • A tool to attract private investment • A complex investment with many stakeholders – good understanding of structure, risks & challenges • Many projects around the world developed by PPP / BOTgreat opportunities 20 Vicky D. Kefala, BA Econ. , MBA Finance
PPP References – EUROPE & GLOBAL • EUROPEAN INVESTMENT BANK (EIB) http: //www. eib. org/epec/about/ • WORLD BANK http: //ppp. worldbank. org/public-private-partnership/ Vicky D. Kefala, BA Econ. , MBA Finance
THANK YOU Vicky D. Kefala MBA Finance, BA Economics Head, Investments & Development Projects CONSOLIDATED CONTRACTORS COMPANY (CCC) 23
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