Interactive Workshop:
Financing Infrastructure Projects in Cities
Avoiding Traps and Achieving Sustainability
1
21 May, 20...
2
Working together to explore two important tools
for evaluating sustainable infrastructure
Format: Workshop
“Participant ...
1. Familiarity, not mastery
2. Advanced tools (Value for Money, GIB Grading)
3. Projects not truly comparable
4. Informati...
4
The Project:
• Purpose: Relieve traffic, keep Ottawa
competitive, reduce carbon
• Challenge:
• Tunnel under a river
• Buil...
Steps in VfM Analysis:
1. Define the Reference Project (First Cost & Operating Cost)
2. Calculate Raw Baseline “Comparator...
7
Illustration of material (major) risks as
probability x consequence
8
Scope and Budget Comparisons: Ottawa LRT
Item
Traditional Public Sector
(This deal “public sector
comparator”)
This deal...
9
Scope and Budget Comparisons: Ottawa LRT
Item
Traditional Public Sector
(This deal “public sector
comparator”)
This deal...
10
It’s more
upfront
money to the
proponent. Is
there “value
for money”
for the
sponsor?
To Proponent
$1718
PSC ASB
PSC = ...
Left side of room
(speaker’s right side):
Consider the table of “scope &
budget comparisons” and the
“value for money” sta...
Transmilenio Bogota: Avenue Septima BRT
12
13
The Project:
• Purpose: Relieve traffic, keep Bogota
competitive, reduce carbon significantly, help
many, many low income ...
Guiding Principles for Sustainable Infrastructure
15
André Schneider
Plenary Discussion of Confederation Line LRT
and Avenue Septima BRT
16
John Macomber
Comparing with GIB Assessment
Result Spiders
17
Left side of room
(speaker’s right side):
Assume you can are an investor
and you must invest in one and
only one of these ...
Conclusion and Best Practices
John Macomber
André Schneider
19
20
Seeking “Value for Money”: Ways to Organize PPP
(Source: GDF Suez)
Asset
Ownership
Operation &
Maintenance
Responsibili...
Insights and Best Practises
21
• Sustainable lifestyles can only be developed if the infrastructure makes choices availabl...
Thank you!
22
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Harvard Busniess School - Financing Infrastructure Projects in Cities by Prof John Macomber at GIB Summit

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Presented at the 4th Global Infrastructure Basel Summit 21 & 22 May 2014. Read more at www.gib-foundation.org.
Next Summit: 27 & 28 May 2015 in Switzerland

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  • Im Programm stehen wir mit dem Titel: Financing Infrastructure towards sustainable consumption. Sollen sie das im Programm anpassen?
  • Harvard Busniess School - Financing Infrastructure Projects in Cities by Prof John Macomber at GIB Summit

    1. 1. Interactive Workshop: Financing Infrastructure Projects in Cities Avoiding Traps and Achieving Sustainability 1 21 May, 2014 André Schneider, Global Infrastructure Basel John Macomber, Harvard Business School
    2. 2. 2 Working together to explore two important tools for evaluating sustainable infrastructure Format: Workshop “Participant Centered Learning” Tools: 1. Value for Money (VfM) 2. GIB Assessment Situations: 1. Confederation Line Light Rail Tunnel, Ottawa, Canada 2. Trans Milenio BRT Avenue Septima, Bogota, Colombia Agenda: 8:30 Introduction and Expectations Ottawa Light Rail: Value for Money Bogota Avenue Septima BRT GIB Grading Conclusions and Best Practices 11:00 Adjourn
    3. 3. 1. Familiarity, not mastery 2. Advanced tools (Value for Money, GIB Grading) 3. Projects not truly comparable 4. Information not complete 5. Analysis should be more detailed and better documented 6. Table partners do not know each other…yet 7. Discussion questions are open ended 8. Alternate plenary / table / plenary / table / plenary 9. Expect energy…Expect uncertainty! 10. Launch pad for Summit 3 We will work together to explore two tools, across two situations, at a high level.
    4. 4. 4
    5. 5. The Project: • Purpose: Relieve traffic, keep Ottawa competitive, reduce carbon • Challenge: • Tunnel under a river • Build an LRT rail system • Build stations • Procure rail cars • Finance construction and ops • Operate it for decades • Capital budget: CAN$ 2.1 bn (about € 1.4 bn) • Process: Highly public, votes, many consultants, “Infrastructure Ontario” 5 Nancy Schepers’ Decision: PPP or “traditional?” Elements of the Decision: • Use Traditional Method? • Issue bonds (general obligation) • Design • Bid • Build tunnel, track - unit cost basis • Procure and own rail cars, stations • Operate (supplement tariffs with subsidy) • Do some flavor of PPP? • Design-Build? Lump Sum? • Finance by proponent (builder)? • Split tunnel, track, stations, rail cars? • Long term operations contract with proponent?
    6. 6. Steps in VfM Analysis: 1. Define the Reference Project (First Cost & Operating Cost) 2. Calculate Raw Baseline “Comparator” (apples to apples on revenue & risk) – as if the whole PPP scope were being done by public sector. 3. Calculate Competitive Neutrality Adjustments (taxes, rates, fees effects for public v private) 4. Identify material risks [geotech, constr, O&M, revenue] 1. Probability x consequence 2. Retained by public sector? Or transferred to private proponent? 5. Calculate PSC Public Sector Comparator: 1. Baseline + Compet Neutrality + Transferable Risk + Retained Risk 6. Calculate VfM “Value for Money” as the DIFFERENCE between “Public Sector Comparator” and the PPP bid + NPV of retained risks. 6 Value for Money (VfM) analysis tries to break down the risk-adjusted components of value in a PPP proposal
    7. 7. 7 Illustration of material (major) risks as probability x consequence
    8. 8. 8 Scope and Budget Comparisons: Ottawa LRT Item Traditional Public Sector (This deal “public sector comparator”) This deal: PPP Proponent Finance, Design, Build, Operate, Maintain Finance the first cost Government issues bonds Design the system Design Firm Build the system Construction Firm Accept Geotech Risk Owner (Government) Operate the System (30 years+) Owner (Government) Maintain the System (30 years+) Owner (Government) Accept Op Cost Risk (30 years+) Owner (Government) Accept Revenue Risk (30 years+) Owner (Government) Projected First Cost Paid to Proponent 1.7 bn NPV Project Cash Flows 30+ years
    9. 9. 9 Scope and Budget Comparisons: Ottawa LRT Item Traditional Public Sector (This deal “public sector comparator”) This deal: PPP Proponent Finance, Design, Build, Operate, Maintain Finance the first cost Government issues bonds Government PLUS private proponent for $300 mm Design the system Design Firm Private proponent design- build Build the system Construction Firm Proponent Accept Geotech Risk Owner (Government) Proponent Operate the System (30 years+) Owner (Government) Proponent Maintain the System (30 years+) Owner (Government) Proponent Accept Op Cost Risk (30 years+) Owner (Government) Proponent Accept Revenue Risk (30 years+) Owner (Government) Owner (Government) Projected First Cost Paid to Proponent 1.7 bn 1.8 bn NPV Project Cash Flows 30+ years The Big Question: How to Tell if it’s Worth Paying More?
    10. 10. 10 It’s more upfront money to the proponent. Is there “value for money” for the sponsor? To Proponent $1718 PSC ASB PSC = Public Sector Comparator ASB = PPP & Retained Risk (Adjusted Shadow Bid)
    11. 11. Left side of room (speaker’s right side): Consider the table of “scope & budget comparisons” and the “value for money” stacks of costs. 1. What are the major uncertainties and risks in this project? 2. What party should bear which of those risks? Right side of room (speaker’s left side): Consider the table of “scope & budget comparisons” and the “value for money” stacks of costs. 1. How else could Nancy Schepers procure this project and its operation? 2. Do Schepers and the Ottawa government realize “Value for Money” if they enter into this PPP as described? 11 Small group discussions-> Explore at your tables:
    12. 12. Transmilenio Bogota: Avenue Septima BRT 12
    13. 13. 13
    14. 14. The Project: • Purpose: Relieve traffic, keep Bogota competitive, reduce carbon significantly, help many, many low income workers get to work • Challenge: • Take existing traffic lanes • Take some adjacent real estate • Build dedicated BRT stations • Procure buses • Finance construction and ops • Operate it for decades • Capital budget: USD$ 508 mm (about € 370 mm) • Process: Highly political; one party likes BRT, one party likes Metro, some people like no change at all. 14 Mayor Luis Eduardo Garzón’s Decision: Build BRT down Avenue Septima in Bogotá? Elements of the go/no-go Decision: • Decide based on which political party in power? • Get a capital subsidy from InterAmerican Development Bank? • Charge fully loaded costs to riders? • Create an operating subsidy from other city revenues? • Get a bigger subsidy for metro instead? • Will abutting businesses contribute to capital and operating costs? • There is no comparison to “Infrastructure Ontario” oversight. • There is no apparent PPP interest
    15. 15. Guiding Principles for Sustainable Infrastructure 15 André Schneider
    16. 16. Plenary Discussion of Confederation Line LRT and Avenue Septima BRT 16 John Macomber
    17. 17. Comparing with GIB Assessment Result Spiders 17
    18. 18. Left side of room (speaker’s right side): Assume you can are an investor and you must invest in one and only one of these projects. • Based solely on the GIB Assessment as you understand it, in which project would your table group invest? • Why? What are the three main factors in your decision? Right side of room (speaker’s left side): Consider the Ottawa situation, the Bogota situation, VfM, and the GIB assessment. • What are the three biggest traps in delivering sustainable infrastructure, as experienced by your table group? • What is the best way to avoid each trap? 18 Small group discussions-> Explore at your tables:
    19. 19. Conclusion and Best Practices John Macomber André Schneider 19
    20. 20. 20 Seeking “Value for Money”: Ways to Organize PPP (Source: GDF Suez) Asset Ownership Operation & Maintenance Responsibility Capital Investment Commercial Risk Term A - Management Contracts Public Public / Private Public Public 3 – 5 year contract B - Operation and Maintenance Contracts Public Private Public Public 8 – 15 year contract C - Lease/ Affermage Contracts (i) Public Private Public Private / Public 8 – 15 year contract D - Concession Contracts Private / Public (ii) Private Private Private / Public 20 – 25 year contract E – Private Utilities Private Private Private Private Indefinite (License to Operate) i: Leases and affermage contracts are generally public-private sector arrangements under which the private operator is responsible for operating and maintaining the utility, but not for financing the initial investment. ii: In concession contracts, the new works funded by the private operator are amortized in the accounts of the operator; but the works return to the Public Authority after the term of the contract.
    21. 21. Insights and Best Practises 21 • Sustainable lifestyles can only be developed if the infrastructure makes choices available that support these objectives. • But confronting these challenges of climate change mitigation and adaptation, resource scarcity and energy security will require massive investment in the fundamental reconfiguration of the infrastructure that supports modern society. • This implies that every infrastructure that will be developed has to comply with sustainability characteristics and this for all aspects of sustainability: social, environment, and economic. • Our experience shows clearly that not achieving such compliance will result in important risks for infrastructure projects, like costs for non-compliance, delays in project implementation or use of infrastructure, difficulty to assure project financing, and finally discontinuation of the project. • During the conference, we will deepen many of the mentioned topics, like: – sustainable transportation, today at 14:00; – increasing credit worthiness, today at 16:00; – sustainable infrastructure as an asset class, tomorrow at 9:00; – sustainability grading, tomorrow at 11:00; – sustainable credit rating, tomorrow at 13:00.
    22. 22. Thank you! 22
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