PPP and financial crises; how did the financial crises impacted PPP market in particular and project finance market in general? What is the impact on VFM? What are the remedies?

1. How has financial crises
changed PPP market?
Filip Drapak
World Bank Institute
May 2009

2. quot;Infrastructure offers significant investment opportunities for long-term investors, even
in a time of global crisisquot;
Ngozi N. Okonjo-Iweala, Managing Director,
World Bank, December 2008
“Recent review of infrastructure projects for the last six months, including social
projects, statistics revealed that 50% were unaffected by the global financial crisis, 25%
had had substantial increases and 25% had been cancelled.”
Tadesse Admassu, Development Bank of Southern
Africa (DBSA) international division executive vice-
president, April 2009
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3. Key issues of PPP in financial crises
 PPP economics have changed
 Lack of funding on both equity and debt side
 Lack of interest of investors and operators
“The monoline wrapped bond market, which has been the financial structure of
choice for large PFI projects over the past 10 years, is now effectively closed to new
transactions. This has increased reliance on the banking market.
The combination of capital adequacy requirements, reduced liquidity and higher
funding costs has increased the strain on the project finance banking model. While
the banks’ views of the PFI risk profile have not changed materially, funding
availability is limited and credit margins have moved up.”
Andy Rose, Executive Director, PUK
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4. PPP economics have changed
 Economic cycle has to be taken in to the account
“Equity price bubble busts every 13 years on average, last for
2 ½ years and are associated with GDP losses of 4 percent of
GDP. Housing price busts are less frequent, but lasted nearly
twice as long and were associated with output losses that
were less twice as large…”
World Economic Outlook
 Risk management and mitigation implication
(a) Country risk
(b) On project risk
(c) Refinancing risk
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5. PPP economics have changed
 Implications for the VfM
(a) Projects less likely to achieve VfM
- Increased cost of equity
- Increased role of equity and proportion of equity financing
- Increased cost of debt (offset by lower interest rates?)
(b) Fiscal space implications to VfM
(c) Some governments more rigorous on VfM and can be more keen on
litigation
Ernst & Young’s P3 team in the UK infrastructure reports that the average
margin for availability payment-based P3s, increased from 82bps to 94bps
between May and August 2008. Volume based payment P3 projects had
average margins of 155bps in August 2008, which is increase of 50bps since
credit crunch.
Ernst&Young’s UK infrastructure report
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6. PPP economics have changed
 VfM might be lost at the current market, this can however be offset by fiscal
and macro economical benefits of PPP
PPP lifecycle cost PSC: public model
VfM lost
equity
debt
“Greater emphasis also needs to be made towards the social economic
benefits delivered to a country or region which could mean adopting a
more visionary approach to PPP models to include agglomeration benefits.
Failure to do so will mean that PPP projects may never get off the ground
on a pure cost benefit basis.”
EC Harris, Is PPP dead and buried?
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7. PPP economics have changed
 is there evidence for change in economics of PPP?
Global project finance 2007/2008
51.3
Equity financing
74.4
15
Bond financing
5.7
2007
2008
212.1
Loan borrowing
234.9
Global project 278.4
finance 315
0 50 100 150 200 250 300 350
USD billion Project finance 2009
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8. PPP economics have changed
 is there evidence for change in economics of PPP?
Change in 2008 in %
60
45
40
20 11
0 Loan borrowing
%
Loan borrowing Bond financing Equity financing Bond financing
-20 Equity financing
-40
-60
-62
-80 Project finance 2009
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9. Global PPP in 2008
 Volume of PPPs have stagnated in 2008 on the 2007 level with growth mainly
generated in North America region (203% growth), however the 4Q volume fell 38%
(in comparison to 4Q 2007 volume)
Global PPP in 2008
Midle East anhd North Africa 4.5
Asia 11.3
North America 8.4
Spain 4.6
Portugal 6.4
UK 10.9
Global PPP 67
0 10 20 30 40 50 60 70 80
Project finance 2009 USD billion
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10. Case study: A1, Motorway in Germany
 This is 72 km of existing motorway that shall be widened and refurbished
PPP type: DBFO concession (design, build, finance and operate)
Length: 30 years
Contract value: EUR 650 million
Financiers: HVB, Caja Madrid, DZ Bank
Sponsors:John Laing, Bilfinger Berger, Johan Bunte
Financial closure: 10 July 2008
 Original banks “disappeared” (Bilfinger Berger)
 Bigger margin than expected, flexible rates (fixed were expected)
 Smaller commitments from banks
 However largest PPP in Germany so far
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11. Case study: M6 Phase III Motorway in Hungary
 This is 65 km motorway extension in Hungary
PPP type: DBFMO (design, build, finance, maintain and operate)
Length: 30 years
Contract value: EUR 520 million
Financiers: EIB and consortium of banks
Sponsors:Bilfinger Berger, Porr Solutions, Egis Projects
Financial closure: 17 June 2008
 Larger number of banks than initially expected (10 instead of 4)
 Bigger margin than expected, flexible rates (fixed were expected)
 Smaller amount raised
 EIB refinanced EUR 200 mill. only two weeks after financial close
 “Financial closure delay of few weeks would kill the deal” Bilfinger Berger
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12. Case study: Mexico’s Farac I and II projects show how market conditions
have changed at project level
• Farac I (30 year concession) Farac II (30 year concession)
• Characteristics: Four roads spanned 550 km Characteristics: Three roads spanned 850km
in west-central region. Construction cost of which 370 km is new construction in
US$137 million
Pacific coast.
• Tender date: Aug 2007
Tender date: 27 Feb 2009
• Number of bidders: 6 consortia
Number of bidders: 2 consortia
• Sponsors ICA and Goldman Sachs
Minimum price: US$2.29 billion:
• Winning bid: US$4.17 billion
• 47% higher than gov
Public bank contribution: Banobras to
and market expectations provide Pesos15-18 billion to successfully
• Debt/equity: 80/20 bidder and Fonadin to provide up to 30% of
• Project revenues: Toll fees debt
• Project funding sources: Issues other than financial crisis:
• US$3.4 billion local denominated Concerns over right of way
currency, short-term mini perm financing Sponsor skepticism over government traffic
(Commercial banks)
• Lending was done on the projections
expectation of refinancing through
securitization which has not happen yet. Status: Canceled. STC: both bids too low
Project will be restructured and retendered
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Source: Ada Karina Izaguirre, PPIAF, World Bank

13. Policy and Governance implications
 Procurement has to be more flexible, shorter and financial market risk sensitive
Market flexibility and procurement flexibility
Procuring authorities are suffering from the higher financing costs and bank fees, as
well as greater transaction costs from procedures and negotiations that are taking
longer to conclude. One risk is that final bids that were thought to have committed
financing are reopened as debt continues to be re-priced. It’s no longer realistic to
insist on committed financing at the bid stage – most lenders require price flex, or
indeed market flex clauses (in which most terms, not just pricing, can be adjusted).
This makes it impossible to conclude the financial evaluation of private partner
proposals until much later in the process, and sometimes not even until days before
financial close.
This creates significant headaches for procuring authorities. How can a preferred
bidder be selected if the financial proposal is not known with great certainty? How can
competitive tension be maintained in final lending negotiations until well after
preferred bidder selection? Should government share the pricing risk to which the
preferred bidder is currently exposed? In one current UK social infrastructure P3, the c.
$150M debt package has been re-priced twice since April this year, and closing has
been delayed.
CCPPP, 2009 13

14. Policy and Governance implications: introducing DFC
 As one of potential policy measures to improve the financing of PPP projects
UK government used so called DFC (Debt Funding Competition)
What is a DFC?
A DFC is an initiative that has been employed in the UK a number of times
since 2000 and has been championed by the UK HM Treasury as a
mechanism for government to induce competition and thereby obtain more
favorable debt funding terms.
When using a DFC, government selects a preferred bidder and that preferred
bidder, in consultation with government, then goes to the debt market
seeking the best price for the debt funding for the project.
The objective for the UK government was to increase the competitiveness of
the lending market with a view to reducing the overall cost of the project.1
We are now in a very different market where the primary focus of the DFC
would be to source sufficient debt funders willing to lend to the project.
David Lester and Chris Keane, 2009
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15. Policy and Governance implications: introducing new institutions
and guarantee support mechanisms
 The solutions often suggest new institutions, from US discussion regarding the
Infrastructure bank, ideas of setting up national guarantee instruments to the
discussion on a new role of multilateral and development institutions.
How to mitigate the impact of the financial crisis on PPPs2009
The French Institute for PPP (IGD - Institute de la Gestion Déléguée) released in
November its proposals to mitigate the impact of the financial crisis on PPPs in
France. IGD suggests to address the issue of lack of liquidity through the delinking
of the duration of contracts and the duration of loans that would allow the short-
term financing of projects and its long-term refinancing when market conditions
will be more favorable, and the creation of a special public vehicle that would be
entitled to collect and provide long-term resources to support banks activities.
IGD also proposes to reduce the impact on costs through a special state warranty
on local authorities’ projects, and calls for a broader public support through
investment subsidies when construction periods are important.
Pierre Van de Vyver, 2009
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16. Conclusions
 PPP economics jeopardized by financial crises impact, however this is
temporary impact
 PPP is not solution in time of financial crises – do not attempt to stimulate
economy using PPPs
 Smaller transactions and larger risk diversification are demanded by the
financial market
 Long maturities still available but costly
 Bigger role for development banks and multilateral institutions
 Governments should focus on building the pipeline for the future post financial
crises PPPs and improve policies and procedures for the bidding to accommodate
current situation, perhaps introduce debt funding competition (DFC)
 Bond, wrapped or privately insured financing not really available
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