Structured Public Finance in Latvia Riga 21 September

Structured Public Finance in Latvia Riga - 21 September, 2007

1. Introduction 1

EUROHYPO AG – GLOBAL SPECIALIST BANK n Lender to public sector worldwide n Structured solutions for capital projects n Total assets in excess of € 200 bn 7 E 012 2

WHAT WE HAVE DONE? A broad range … n Public buildings n Road construction n Hospitals n Defence projects n Service contracts 7 E 012 3

2. Background 4

PUBLIC SECTOR DILEMMA n Dilemma of Public Sector globally – ever rising need for capital investment hampered by budgetary constraints n Demographics of aging populations pose … n Huge challenges, especially: pension and health n Top 10 pension funds globally belong to the public sector 7 E 012 5

STRUCTURED PUBLIC FINANCE n Structured Public Finance enables varying degrees of private sector participation n Starting with outsourcing services, but keeping the financing as ‘full faith and credit’ of the Public Sector Entity n Progressing through to ‘full risk transfer’ models of UK-style Public Private Partnerships (PPP) n Massive growth potential across full range of structures given EU / Eurostat restrictions 7 E 012 6

3. Basics 7

PPP – OUTLINE A many splendoured thing – but what is it really ? 7 E 012 8

KEEPING IT SIMPLE! Traditional procurement 7 E 012 Partnership model 9

WHAT ARE THE OBJECTIVES? n Quality public assets & services (outputs) n Delivered on time to budget n Payments subject to output delivery as specified 7 E 012 10

HOW DOES IT WORK? n Use of private sector expertise n Private sector incentive – capital at risk n Integration – ‘life cycle approach’ 7 E 012 11

KEY WORDS n Efficiency n Optimal risk sharing n Accountability n Transparency 7 E 012 12

DOES THE CONCEPT WORK IN REAL LIFE? For procurement – YES !! Traditional procurement Public / Private Projects over budget 73% 20% Projects late 70% 24% Source: National Audit Office, UK 7 E 012 13

WHAT’S BEEN DONE IN THE UK? n Private Finance Initiative – type of PPP n 700 projects+ signed since 1992 n Value £ 49 bn n 20 sectors – Department of Health accounts for 21% n Total service payments p. a. <2% of Government budget 7 E 012 14

4. Lessons Learnt 15

GENERAL OBSERVATIONS n Value for money? n Equity requirement n Funding n Lack of transparency 7 E 012 16

COMPETITION Significant up-front costs for all bidders 7 E 012 Restricts number of bidders and hence competition 17

CHANGE REQUIREMENTS “The greatest enemy of a good plan is the dream of a perfect plan. ” von Clausewitz n The unexpected does happen n Change is expensive 7 E 012 18

POLITICAL SENSITIVITIES n Dilemma of re-financing gains n ‘Backdoor privatization’ n Selling the ‘family silver’ 7 E 012 19

A CASE IN POINT Hungary – Motorway PPPs: Total Value € 1. 3 bn n 1993 M 1 / M 15 PPP – concessionaire insolvent n 1995 M 5 – revenue subsidy n 2005 M 6 – availability payments 7 E 012 20

5. Hard Questions 21

A QUESTION OF RISK n Assets suitable for full risk transfer? n Classic PPP implies full risk transfer n But at a price! 7 E 012 22

SEPARATION OF FINANCING! n Is the PERCEIVED risk transfer worth the ‘insurance premium’? n Why pay for risk transfer when in reality Public Sector obligations remain? n An Alternative to the Traditional UK PPP / PFI model 7 E 012 23

6. An Alternative Model 24

LATVIAN NATIONAL DEVELOPMENT PLAN 2007 – 2013 Sustained Development – co-ordination, balance, purpose n Infrastructure n Energy n Waste management n Housing 7 E 012 25

OPTIMAL RISK TRANSFER – AN ALTERNATIVE FOR LATVIA ? Key features n Separate financing from performance risks of project n Public Sector body contracts with private sector n Flexibility – option for periodic capital injections n Reversion of asset to PSE 7 E 012 26

ASSET FINANCING FOR PUBLIC SECTOR ENTITY n SPV purchases asset for use by PSE n Long-term contract between SPV and PSE n Bank acquires receivables under long-term agreement n PSE agrees to direct & unconditional payments to Bank 7 E 012 27

ASSET FINANCING FOR PSE Contractor PSE Uses Delivers Construction Agreement Payment of construction costs Owns Asset Unconditional Payments (interest & amortisation of total amount) Payment of the purchase price of Receivables Eurohypo SPV Sale of Receivables from Lease Agreement Services 7 E 012 28

7. Practical examples 29

GERMANY School: Value € 4. 7 m 7 E 012 30

SWEDEN Municipal sports leisure complexes n SPV n Assignment n Monetization of receivables 7 E 012 31

UNITED KINGDOM Complex military procurement n Skynet 5 PFI – value £ 1. 3 bn n Satellite communications system n Three spacecraft & upgrade of terrestrial infrastructure 7 E 012 32

7. Conclusion 33

A PARTING SHOT! n “Classic PPP” = sub – optimal in Latvian context? n A simple yet effective alternative 7 E 012 34

A SUITABLE QUOTE. . . “With regard to excellence, it is not enough to know, but we must try to have and use it. ” Aristotle 7 E 012 35

PUBLIC FINANCE CONTACT DETAILS Eurohypo AG Rupert Harrison Peter Hellman Managing Director Head of Global Origination Public Finance Vice President United Kingdom 7 E 012 Telephone +44 (0)20 7759 7445 Mobile +44 (0)77 7550 0378 Fax +44 (0)20 7759 7670 Telephone +44 (0)20 7759 7462 Mobile +44 (0)77 7032 2428 Fax +44 (0)20 7759 7670 Helfmann-Park 5 65760 Eschborn Germany Eurohypo AG London Branch 4 th Floor, 90 Long Acre London WC 23 9 RA rupert. harrison@eurohypo. com peter. hellman@eurohypo. com 36

Structured Public Finance in Latvia Riga - 21 September, 2007

Eurohypo AG is authorised by the Bundesanstalt für Finanzdienstleistungsaufsicht and regulated by the Financial Services Authority for the conduct of UK business