[PPT] - Contents A Typical PPP Structure Key Investor Issues Key PowerPoint Presentation

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Public Private Partnerships – Opportunities and

Challenges

22 February 2005

Jonathan Drew

HSBC Corporate, Investment Banking and Markets

SLIDE 2

A Typical PPP Structure

Government Special Purpose Vehicle Debt Operation Construction

Payment for service Finance Services

Equity

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SLIDE 4

Key Investor Issues

Clear policy and commitment for the Investment programme

– Government obligation undertaken by appropriate entities – Letting authorities adequately resourced and empowered for decision making – Clarity on budget and affordability constraints – Clarity on competing or complementary developments

Allocation of Risk and Reward

– Risks must be clearly defined and appropriately allocated by contractual framework – Appropriate level of returns to private sector for risks undertaken

Project Structure

– Contractual arrangements structured to facilitate debt financing and optimise

verall cost of capital

– Output specification clearly defined on long term basis

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SLIDE 5

Key Bankability Issues

Clear contractual framework for allocation of risks
Adequate security on project assets
Proven track record of payment and performance by participants
Ability to step into project
Alternative suppliers
Adequate reorganisation or protection against changes in underlying project economics

and specifications

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SLIDE 6

Successful Implementation of a PPP Programme

Good project selection
Transparency of evaluation approach
Engage in prequalification and expression of interest to some broad stakeholder support

and commitment to project

Well defined bid package with clear assessment criteria and output specifications
Establishment of enabling legislative and regulatory framework
Project teams with appropriate skills to structure and evaluate the bids and negotiate the

contracts

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SLIDE 7

PPP Implementation Process

Identify the requirement
Initial feasibility and assessment of

value to Government - PSC

Initial prequel and expression of

interest

Request for proposal
Review and evaluation of

submissions

Negotiations and selection of

preferred bidder

Negotiation with preferred bidder
Commercial close

Procurement

Involve industry private sector?

Financing Process

Obtain financing proposals
Due diligence

– Insurance – Technical/Environmental – Financial – Commercial – Legal Due Diligence

Documentation
Syndication of loan
Financial Close

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SLIDE 8

Finance Instruments

Senior Debt – 60 – 90% of Capital Value Project Equity – 10 – 30% of Capital Value Project Funding Project Cashflows Senior Debt (Bank / Bond)

Typically long dated debt, amortising over the

period of the Infrastructure Asset / Concession Contract: Generally fixed rate debt Equity

Typically injected either as share capital or

subordinated debt

Stable base yield can be enhanced by tax

benefits, third party recourse or residual value

f asset

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SLIDE 9

Sources of Private Capital

Long term senior debt provided through domestic or international banking and capital

markets

Developed capital markets can offer longer dated fixed price financing than bank

markets – will require rating

Bank financing may offer more flexible financing structure than capital markets
Primary Equity providers remain the sponsors. Increasing interest to provide equity by

financial institutions and investors attracted to stable long term yield

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SLIDE 10

Hong Kong Market - key developments

Fewer international banks operating locally are seeking to book project assets
But the local Hong Kong and PRC banks remain very keen – subject to relationships and

policy

The local HK$ capital markets have been greatly developed – including the retail investor

base – monolines willing to wrap - however, the loan market will offer long maturities in HK$

Hong Kong economic and currency issues remain in lenders and investors focus
Several Government initiatives to test the local and international appetite for Hong Kong

project risk post 1997

HK sponsors remain strong enough to invest in Hong Kong, but are opportunities better

elsewhere?

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SLIDE 11

Case Study - Infrastructure - AsiaWorld Expo

Project Description

Design, build and operate a new 100,000m2 exhibition centre at Hong

Kong International Airport over a 25 year concession period

Initial phase of 66,000m2 to be followed by an expansion to take it up to

100,000m2

Tender invitations issued to 4 short listed bidders after more than 20

parties who have expressed interest

Project involves the formation of a JV between public and private

sectors with Government contributing HK$2bn in equity and the land. Size

Construction costs of approx HK$4bn (HK$2.4 for Phase 1 and

HK$1.6bn for Phase 2) HSBC Role

Advisor to the successful bidding consortium led by Dragages et

Travaux Publics HK Ltd (Bouygues)

Asia World Expo Hong Kong

(Dragages et Travaux Publics, NEC, Yu Miing Investments)

Project International Exhibition Cen Awarding Authority Hong Kong SAR Government tre

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Case Study - Infrastructure - AsiaWorld Expo

Contractual Structure

Asia World Expo Hong Kong

(Dragages et Travaux Publics, NEC, Yu Miing Investments)

Project International Exhibition Cen Awarding Authority Hong Kong SAR Government tre

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Case Study - Infrastructure - AsiaWorld Expo

Project Structure

JVCO to be formed between with Government and Airport Authority

(“Holdings” : 76.5%) and the private consortium (“JVP” : 13.5%)

Airport Authority contributed land deemed worth 10%, meaning effective

project cost of HK$2.65bn

Holdings shareholding via ordinary shares and JVP via preference

shares, allowing JVP priority access to dividends over Holdings

JVCO separated from OPCO to minimise risks to JVP shareholders from
perational and market risks
Government sought to create a structure such that it was in the interests
f the private consortium to minimise construction costs, but also to

ensure an operationally efficient design to ensure project value for money

Financing for Phase 1 via equity from Government (HK$2bn) & private

consortium (HK$0.4bn)

Phase 2 expected to be debt financed with no Government contribution

Asia World Expo Hong Kong

(Dragages et Travaux Publics, NEC, Yu Miing Investments)

Project International Exhibition Cen Awarding Authority Hong Kong SAR Government tre

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SLIDE 14

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

Project Description

Design, build and operate a dual three lane tunnel crossing linking Kowloon to Hong

Kong Island

100% private sector financing
Automatic toll adjustment mechanism
Challenging legislative process

Size

HK$5.2bn (of HK$7.5bn)

HSBC Role

Advisor and Arranger to private sector consortium

Financial close Dec 1993 Loan tenor 15 years Loan pricing 100 – 150 bp Leverage 70% Structural Complexity moderate Bank appetite >20 after syndication

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Case Study - Transport - Western Harbour Crossing

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 Western Harbour Tunnel Company Limited

(CHT, China Merchants, CITIC, Kerry)

Project Western Harbour Crossing Awarding Authority Hong Kong SAR Government

Contractual Structure

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SLIDE 16

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

Project Structure

Innovative swap mechanism to reduce interest rate risk borne by the project

company

Development of a completely new toll adjustment mechanism based on the

cashflows available to the project company which achieved a low initial toll and steady increases thereafter such that the project company was insulated to a great extent from volume risk.

The mechanism was included in the Ordinance and avoided the need for

Government approvals. This allowed for a significantly long debt tenor of 15 years, competitive pricing and set the standard for future toll road financings in Hong Kong.

Investor has an agreed rate of return:
if cashflow is above return cap, then extra cashflow is channelled into a

“toll stability fund”

if cashflow if below return floor, investor has the right to:
draw from the stability fund
adjust the toll level
Government does not take traffic volume risk

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SLIDE 17

Thank You

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