1. 1
Public Private Partnerships β Risks which a
Lender may assume
30 September 2005
Jonathan Drew
HSBC Corporate, Investment Banking and Markets
2. 2
Contents
β’ A Typical PPP Structure
β’ Benefits of Third Party Funding
β’ PPP Risk Allocation and Lenders Appetite
β’ Risk Allocation and Finance Structures
β’ Financing Issues and Implementation
4. 4
ο§ Access to wider sources of capital for large scale funding requirements
ο§ Improved and more secure funding streams
ο§ Assists short term budget management
ο§ Capital at risk motivates participants to achieve a more efficient outcome
ο§ Lower risk to public sector due to rigorous private financing process
ο§ Credit provider will seek to ensure adequate protections and mitigants are in place
ο§ Government retains operational and planning responsibility
ο§ Government pays only when project are available and performance is up to standard
ο§ Ability of private sector to deliver on cost effectiveness/efficiencies β offsets
higher financing costs
ο§ Better value through risk transfer, whole life costing and competitive process
Benefits of Third Party Financing
Certainty of
Funding
Appropriate
Risk Allocation
Value for
Money
Public Sector can focus on delivery of core service functions
5. 5
Lenders Repayment Mechanism
Time
$
Exposure to construction
time overruns
Exposure to operating
cost overruns
Traditional Public Funding/Payments
Exposure to construction
cost overruns
Estimated costs Government exposure
$
Dollar amount of the
service payments locked-
in prior to
commencement
PPP/PFI Funding/Payment Approach
Time
No payments until facilities
available for use
Construction period Operations period
6. 6
A PPP contractual structure β appropriate risk allocation
Conventional procurement Typical PPP/PFI
β’ Service provision
β’ Pre-existing conditions
β’ Maintenance and renewal
β’ Regulation/policy
β’ Market / Volume
β’ Design & construction
β’ Service provision
β’ Maintenance and renewal
β’ Pre-existing conditions
β’ Regulation/policy
β’ Market / Volume
GovernmentPrivate sector
β’ Design & construction
7. 7
Lenders Risk Analysis Model
β’ Approvals and Permits
β’ Technology
β’ Construction
β’ Funding
β’ Market / Demand
β’ Operational
β’ Change in Regulations / Law
β’ Force Majeure
Rule of Thumb: Lenders will accept and price risks they can
adequately assess and/or the Borrower can adequately manage
8. 8
Typical PPP/PFI Finance Structure
β’ The finance structure depends on the level of risk in the Project.
β’ Loans to the project company can be structured on a limited recourse basis
β’ Lender will assess whether debt can provide for the majority of the capital requirements
of the project.
β’ Debt repayment will be significantly tied to the performance on the Project
β’ A higher level of gearing typically reduces the overall cost of the Project
UK PFI/PPP ASIA βPPP/PFIβ
β’ Leverage: 80-90% β’ Leverage: 65-80%
β’ Tenor: 20-30 yrs (subject to concession tenor
and market availability)
β’ Tenor: 15-20 yrs (subject to concession tenor
and market availability)
9. 9
Risk Allocation and Finance Structures
β’ Lender will undertake extensive due diligence to measure risk implicit in the repayment
mechanism
β’ Lenders acceptance of risk allocation will be a function of the factors which affect
predictable cashflows over the concession life
β’ Key risks which may not appropriately transferred to the private sector include
β Political/Policy Risk
β Long Term New Technological Risk
β Market / Volume Risk
β’ Inappropriate risk transfer to the private sector may lead to
β Lower gearing
β Higher Pricing
β Shorter Tenor
Risks not well managed by
private sector. Higher risk
of project failure
Higher Overall Cost to
Government
10. 10
Contractual Structure
Asia World Expo
Hong Kong
(Dragages et Travaux Publics,
NEC, Yu Miing Investments)
Project
International Exhibition Centre
Awarding Authority
Hong Kong SAR Government
Case Study - Infrastructure - AsiaWorld Expo
11. 11
WHC Ordinance
Deed of guarantee Deed of shareholder
support
Shareholders
HK Government
Project Agreement
(30 year franchise) Project
Company
Loan Agreement
Construction
Contract (LSTK)
Lenders Contractors
Independent
Traffic study
Independent
Traffic
Consultant
WHC Ordinance
Deed of guarantee Deed of shareholder
support
Shareholders
HK Government
Project Agreement
(30 year franchise) Project
Company
Loan Agreement
Construction
Contract (LSTK)
Lenders Contractors
Independent
Traffic study
Independent
Traffic
Consultant
Case Study - Transport - Western Harbour Crossing
Western Harbour Tunnel
Company Limited
(CHT, China Merchants,
CITIC, Kerry)
Project
Western Harbour Crossing
Awarding Authority
Hong Kong SAR Government
Contractual Structure
12. 12
Western Harbour Tunnel
Company Limited
(CHT, China Merchants,
CITIC, Kerry)
Project
Western Harbour Crossing
Awarding Authority
Hong Kong SAR Government
Project Description
β’ Design, build and operate a dual three lane tunnel crossing linking Kowloon to Hong
Kong Island
β’ 100% private sector financing
β’ Automatic toll adjustment mechanism
β’ Challenging legislative process
Size
β’ HK$5.2bn (of HK$7.5bn)
HSBC Role
β’ Advisor and Arranger to private sector consortium
Financial close Dec 1993
Loan tenor 15 years
Loan pricing 100 β 150 bp
Leverage 70%
Bank appetite >20 after syndication
Case Study - Transport - Western Harbour Crossing
13. 13
Key Financing Issues in PPP/PFI Projects
β’ Legal regime which permits taking
of security and enforcement of
contractual rights
β’ Govt obligations undertaken by
appropriate entities
β’ Political Commitment to PPP and
to specific projects
β’ Competition and availability of
participants
β’ Availability / capacity of long term
debt markets
β’ Availability and establishment
environment of equity participation
β’ Transparent procurement process
Macro
β’ Well defined projects, clarity on
output spec
β’ Strong and experienced
contractors
β’ Appropriate allocation of risk
reflected in payment regime
β’ High quality predictable cash flow β
low volatility
β’ Alternative suppliers
β’ Ability to step in
β’ Adequate termination protection
β’ Protection from other adverse
events, change in law, force
majeure, insurance etc
Micro
14. 14
β’ Identify the requirement
β’ Initial feasibility and assessment
of value to Government - PSC
β’ Initial prequel and expression of
interest
β’ Request for proposal
β’ Review and evaluation of
submissions
β’ Negotiations and selection of
preferred bidder
β’ Negotiation with preferred bidder
β’ Commercial close
PPP and Financing Implementation Process
β’ Obtain financing proposals
β’ Due diligence
β Insurance
β Technical/Environmental
β Financial
β Commercial
β Legal Due Diligence
β’ Documentation
β’ Syndication of loan
β’ Financial Close
Involve
industry
private
sector?
Procurement
Financing Process