Prespectives in financing PPP Projects in Transportation sector

Prespectives in financing PPP Projects in Transportation sector Istanbul, November 2012

Transport Finance • Historically budgetary resources from the governments have been the major source of financing for infrastructure such as transportation projects. • However, growth in the traffic requires continuous investment and improvement in the transportation network.

Difficulties of Transport Finance • It requires large and long-term investment of capital, (i. e. construction, maintenance, overhead expenses) • Financing through state budget is not only costly but also cumbersome • Long procurement procedures create delays and cost overruns • Private sector’s interest is low due to the complexity of the sector and long payback period

How does PPP work: • PPP is a generic name for long term contracts between private and public sector where public and private resources are posted and responsibilities are divided so that the partners compliment each other. • It takes several forms like: – BOT – BOO – Joint Venture – Leasing – Operation or Management Contracts

Why PPP’s • Governments prefer PPPs: • To avoid financing large capital costs directly • To deliver such projects without cost overruns encountered in public procurement • Private sector brings sharp business focus and expertise in the project

Why PPP’s • PPPs also: • Facilitate the project to be implemented on time and within budget. • “No service / no pay” principle ensures that the private partner is incentivized for timely delivery and operation of project assets. • Better overall governance by private sector entities.

Why PPP’s • Under PPP contracts, commercial and technical risks such as construction, operation, maintenance, traffic revenue, land acquisition, permit / approval, force majeure, political risks, and toll collection risks are shared between the concessionaire and the granting authority. • Governments need to provide inducements, guarantees, and subsidies to privatize and support development of transport systems

Public Involvement is required because of: • Rate of return maybe inadequate for private sector • There might be significant positive or negative externalities that require control and regulation • Long term financing may not be available • Such projects are usually smaller parts of integral perspectives

How does PPP work: • The specifications of the project are decided by the public entity • The SPV has the right to build and operate the assets for a specified time period • SPV is a private entity, which borrows the funds needed, constructs and purchases the assets, and is then paid by the public sector client to operate the assets as agreed under a contract.

How does PPP work: • However depending on the cash generation of the project, the payments may flow the other way around, (from the Concessionaire to the Public Entity) • The public entity starts paying once the assets are fully operational, can withhold or reduce payments of the SPV fails to meet the agreed specifications. • Payments from clients are used to remunerate the SPV’s borrowings, pay the operator, and residual profit goes to the shareholders of the SPV.

How does PPP work: • Normally 20 to 30 years. • During the contract period assets are owned by the SPV. • At the end of the PPP the assets are transferred to the public entity. • Financiers lend directly to the SPV. • SPV shareholders may provide some guarantees to the lenders through their mother companies. • The government body provides certain comforts to the lenders like minimum tarrifs, minimum traffic levels etc. • Step-in rights given to lenders are important components of PPP agreements

In typical PPP projects: • The private partner takes design, construction, operation, maintenance and financial risks • The public partner takes legal, political and environmental risks. • The demand revenue risks are usually shared between the partners.

Transport PPPs in European Market In the European PPP market, in 2011, out of 66 projects, transportation represents more than half of the volume Healthcare 3% Education 6% Environment 14% Housing, energy etc. 2% Public order and Safety 12% Transport 58% General Public Services, 11% Source: EPEC PPP database

PPP’s require: Since public interest is involved: • There should be political consensus on the project • The project should have positive economic rate of return, and sound economic and developmental basis • Creation of necessary policy and legislative basis, so that it permits PPP initiatives at national and municipal level (especially regarding step-in rights) • Legislation needs to be clear and consistent and flexible

PPP’s require: • The deliverables should be clearly defined, the realistic cash-flow projections should be made • The projects should be assessed within the framework of the overall transport infrastructure of the country • Public subsidy and public funding should be determined; as it will be necessary to cover the costs • As safety and technical aspects are crucial, all parties involved should have necessary expertise and competence to discharge their responsibilities • PPP contract should be clear, fair, unambiguous and comprehensive.

Black Sea Trade and Development Bank • • Started operations in 1999 A regional development bank Authorized share capital: SDR 3. 0 billion Provides financing for public and private investments including PPPs in the shareholding countries • Headquarters in Greece (Thessaloniki)

Black Sea Trade and Development Bank Shareholders of the Black Sea Trade and Development Bank (BSTDB): • • • Albania Armenia Azerbaijan Bulgaria Georgia Greece Moldova Romania Russia Turkey Ukraine BSTDB

Priority sectors • • • Transport Municipal infrastructure Telecommunications Energy General Industries

BSTDB Financing Transport Infrastructure • No concessional lending • Financing through: • • • Direct senior loan Co-financing Syndication A/B Lending Technical Assistance Fund

Medium and Long Term Loans • Amount • For sovereign and sub-sovereign loans: no ceiling • For private entities: maximum EUR 40 million, minimum EUR 5 million • Maturity • Maximum 15 years, exceptionally longer • Decided on a case-by-case basis • Grace period: normally up to 4 years • Flexible pricing policy

What has BSTDB achieved so far? (signed operations) TOTAL EUR 2. 065 million Project and corporate finance EUR 1. 156 million SME finance EUR 700 million Trade finance EUR 125 million Equity EUR 61 million uarantee EUR 23 million As of end October 2012

Financing Provided by sectors Mining 1% Mining 2% Construction 2% Telecommunications 5% Public Utilities and Transport 11% Services and Real Estate 3% Financial institutions Financial Institutions 35% 44% General Industries Manufacturing 21% Energy 13% Energy 17%

Financing Provided – Examples: Adana Light Rail Transportation System • Scope of the operation: Construction of 13. 6 km bi-directoral light rail system for inner-city transportation under a turn-key contract. • Total Project cost: USD 667 million • BSTDB participation: USD 45 million • Maturity: 10 years

Financing Provided – Examples: Adana Light Rail Transportation System • Borrower: Adana Metropolitan Municipality • Guarantor: 95% sovereign guarantee • Co-Financiers: Several ECAs and international commercial banks like: SEB, ING, UBS, Nordic Investment Bank, Societe Generale, West LB and Vakifbank • Contracters: ABB, Bombardier and Alarko

Financing Provided – Examples: Istanbul Metro Otogar – Olympic Village Line • Scope of the operation: Extension of the existing metro system between Otogar – Bagcilar and Olympic Village with 17. 6 km long double-track system • Total Project cost: USD 532 million • BSTDB participation: USD 21 million • Borrower: Istanbul Electric Tramway and Tunnels Administration • Guarantor: Istanbul Metropolitan Municipality • Co-Financiers: Several international banks and ECAs • Contracters: Gulermak – Dogus Consortium • Maturity: 8 years

Financing Provided – Examples: Istanbul Metro Kadikoy - Kartal Line • Scope of the operation: Construction of a double track system metro line of 21, 020 m. to serve seventeen stations along the D-100 highway between Kadikoy and Kartal • Total Project cost: EUR 751 million • BSTDB participation: EUR 50 million • Borrower: Istanbul Metropolitan Municipality • Co-Financiers: Other Club banks: Fortis, Dexia, Calyonbank, Societe Generale, Unicredito, West LB, Vakifbank • Contracters: Astaldi – Makyol – Gulermak Joint Venture • Maturity: 10 years

Financing Provided – Examples: Ukrainian Railways • Scope of the operation: Syndicated medium term loan facility for general corporate purposes, including renovation of rolling stock, modernization of track, upgrade and renovation of railway stations, depots and bridges • Total Project cost: USD 300 million • BSTDB participation: USD 36 million • Borrower: Several Ukrainian State Railway Enterprises • Guarantor: State Administration of Rail Transport of Ukraine

Financing Provided – Examples: Port of Poti – Oil Terminal • Scope of the operation: Building a new terminal in Port of Poti, which is the least-cost export route for oil products from Caspian Sea to the black Sea, for trade of oil products between Caspian and Mediterranean countries • Total Project cost: USD 33 million • BSTDB participation: USD 10 million • Borrower: Channel Energy Ltd (Georgia) • Sponsors: Tower Holdings (Luxemburg), Delta Petrol Group (Turkey) • Other Financiers: EBRD with USd 13 million • Contracters: Ustay Construction Ltd (Turkey)

Financing Provided – Examples: Port of Ilyichevsk • Scope of the operation: Establishing and financing of a grain terminal in the Port of Ilyichevsk, to serve as a leading grain handling facility in Ukraine • Total Project cost: USD 27. 2 million • BSTDB participation: USD 9 million • Borrower: East Agro Investment BVI • Guarantor: Estron Corporation, Nicosia • Maturity: 7 years

BSTDB Operations Ankara Esenboga Airport • Scope of the operation: Construction, operation and financing of a new domestic and international terminal at the Esenboga Airport in Ankara • Total project cost: EUR 196 million • BSTDB participation: EUR 18 million • Co-financiers: Proparco and other Commercial Banks

BSTDB Operations Sabiha Gokcen Airport • Scope of the operation: Provision of a project finance facility for construction of a new international terminal building • Total project cost: EUR 451 million • BSTDB participation: EUR 29 million • Co-financiers: A syndication of banks led by RBS and Yapı ve Kredi Bankası A. Ş.

BSTDB Operations Pulkovo Airport Development • Scope of the operation: Provision of a project finance facility for expansion, operation and maintenance of Pulkovo Airport in St. Petersburg • Total project cost: EUR 1, 193 million • BSTDB participation: EUR 15 million • Co-financiers: A Syndication of Banks including: VEB, EBRD, IFC, Ni. B, Eurasian Development Bank and others

Transport initiatives with involvement of BSTDB takes part also in some initiatives that aim at facilitating transportation and trade in the greater Black Sea Region

Transport initiatives with involvement of BSTDB: Black Sea Ring Highway • Initiated by BSEC • Aims at linking the transport system of Central and South Eastern Europe to the Black Sea and Asia, accelerating construction of connection between Black Sea countries as alternative to the sea routes and parallel to the new energy networks. • It includes several elements like: • Preparation of socio – economic cost – benefit analysis • Road management and maintenance • Road safety • Financing under PPPs scheme • Environmental issues

Transport initiatives with involvement of BSTDB: Development of Baku–Tbilisi–Trabzon Model Highway • This is a model for a larger scale road facility project. • The purpose is to improve the road with modern ancillary infrastructure and support roadside facilities, designed and built jointly by national governments, international financial institutions, international organisations and the business community to demonstrate the economic potential of inter – regional road transportation in Black Sea Region. • It includes: - implementation of institutional reforms - development of the ancillary infrastructure along main road arteries - Introduction of state-of-art practices and technologies at border crossings and customs posts - Foundation of a multilateral financial mechanism

Whom to contact Orhan Aytemiz – Director Tel: (+30 2310) 290 439 Fax: (+30 2310) 290 469 E-mail: oaytemiz@bstdb. org info@bstdb. org Web site: www. bstdb. org