Investing in Transport Infrastructure in East Asia: Lessons from the - - PowerPoint PPT Presentation

Investing in Transport Infrastructure in East Asia: Lessons from the Philippines and Korea 22 February 2005

• 1. Introduction
• 2. Case study 1 : Manila North Tollway Project (the Philippines)
• 3. Case study 2 : Daejon Riverside Expressway (South Korea)
• 4. Principal issues and hurdles to achieve PPP structures
• 5. Conclusions

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• 2. Case Study:

Manila North Tollway Corporation

– Project Phase 1 : Rehabilitation and widening North Luzon Expressway (approx. 80km) – Grantor : Toll Regulatory Board – Sponsors : Lopez Group/Egis/ Leighton/PNCC – Concession period : 30 years – Total project cost : USD 370m – Operating since February 2005 – Concession contract to international standards – Existing road was already tolled and

• perated by PNCC

2 Source: Egis Projects SA

• 2. Case Study:

Manila North Tollway Corporation

Principal features and critical points : A 10-year long development. Time table was prolonged by materialised risks and other factors

Date Events 1994 Beginning of the development of the NLE as a ROP Flagship project 1997 Signing of JV Agreement with PNCC April 1998 Signing of the Concession Agreement June 1998 Presidential Approval 7 July 2001 Financial closing February 2003 First draw down and Commencement

• f Works

February 2005 Opening End of 2027 End of Concession

– Long negotiations to achieve international standards for the concession contract – A few legal challenges on the procurement process – Asian financial crisis – Long negotiations to achieve financial closing involving 3 multilateral agencies, 2 export credit agencies and 7 other financial institutions – Major delays in land acquisition process due to lack of funding from the government – Hurdles were overcome by a strong team of sponsors with excellent local reputation.

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• 2. Case Study:

Manila North Tollway Corporation

Principal features and critical success factors for the project – Acceptability Level of service increase and standards commensurate to increase in toll rate Information and transparency – Sustainability Appropriate long term allocation of risks and responsibilities between private sector and public sector Pre-adjustment mechanism in the concession contract dealing with inflation, exchange rate, Force Majeure etc.

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• 2. Case Study:

Manila North Tollway Corporation

Principal features and critical success factors for the project – Bankability Strong economic fundamentals: a brownfield project with strong existing traffic Sound contractual structure Appropriate support for government and direct political risk insurance or through involvement of multilateral agencies.

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• 2. Case Study:

Manila North Tollway Corporation

A sophisticated but strong financing plan for USD 370m – Strong commitment from the shareholders Debt/equity ratio of 68/32 Pre-financing of development up to USD 60m – Loans arranged with 2 multi-lateral agencies : ADB and IFC (direct and guarantees) Political risk insurance : MIGA Export credit agencies : COFACE and EFIC 7 commercial banks providing covered loans

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• 2. Case Study:

Manila North Tollway Corporation

A sophisticated but strong financing plan for USD 370m – Robustness of the case Cover ratios above 2.0 Sponsors support Re-financing possibility for part of ADB loan in local currency

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• 3. Case Study:

– Project Phase 1 : Section 4, a 5.5km urban toll road – Grantor : Daejon Metropolitan City – Sponsors : Doosan-Egis-Singapore Piling – First BOT project with foreign investment successfully implemented under the Korean PPI Act – Concession period : 30 years – Total project cost : USD 130m – Operating since July 2004

Source: Egis Projects SA 8

• 3. Case Study:

– Strong sponsors team : a mix of technical expertise, local knowledge and culture with project finance expertise – PICKO also developed a strong expertise – Asian financial crisis – Long negotiations to achieve financial closing – Major changes of design requested by the Grantor after the start of construction which resulted in some claims – Major delays in land acquisition process

Date Events July 1998 Signing of a Cooperation Agreement with Daejon City February 1999 Signing of the Concession Agreement January 2001 Approval by PICKO 5 February 2001 Signing of Addendum ~2 to the Concession Agreement 2 November 2001 Financial closing 15 November 2001 Receipt of the bonds proceeds by DRECL 20 December 2001 Commencement of Works August 2004 Opening End of 2031 End of Concession

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• 3. Case Study:

– Strong support from the Korean Authorities required since the underlying project (traffic risk) was new to JPY bond holders in this environment – Multi currency financing: JPY, USD and KRW – Major issues with the termination provisions, exchange risk and indemnity agreements.

G uarantee G uarantee Proceeds of the Bonds K RW Bank Loan Equity K IC G F S

H A R E H O L D E R S

H

A N A B A N K

D R E C L B

O N D H O L D E R S

IR

ISH SPC

Loan D aejeon M etropolitan C ity

A sophisticated financing plan for USD 130m

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• 4. Principal Issues and Hurdles to Achieve PPP Structures

– Procurement The initial definition of the project by the Grantor could be more successful with the help of reputable advisors of the PPP market : understanding the consequences for the Grantor A Transparent bidding process is often faster than a negotiated deal A clear selection criteria

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• 4. Principal Issues and Hurdles to Achieve PPP Structures

– Contractual and legal environment Stability of the contractual framework remains key to attract foreign investment A single bad deal in one jurisdiction can affect its ability to attract investors for many years Asia is generally competing with other regions where PPP programmes are very active and perceived risk is much lower

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• 4. Principal Issues and Hurdles to Achieve PPP Structures

– Financial environment Country risk is often an issue in the region hence requiring stronger guarantees from Grantors or multi-lateral support Appetite for long term lending is limited while short term loans do not generally fit the revenue profile of the projects

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• 4. Principal Issues and Hurdles to Achieve PPP Structures

–Risk Transfer and partnership Find the right balance : signing a contract respecting international standards vs. providing strong Grantor support to make the contract bankable Responsibilities and risk sharing mechanism need to be explicit Traps that should be avoided to achieve a balanced partnership “the private sector can pay”: over specify “the private sector are all crooks”: over regulate “the private sector needs to be innovative”: impose level of service or performance not attainable

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• 4. Principal Issues and Hurdles to Achieve PPP Structures

– Community relations Although a public hearing process may not always be enforced in the region, ignoring community related issues can be fatal to the project: Expropriating squatters is not a sinecure Environmental issues require the same care as anywhere else

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• 4. Principal Issues and Hurdles to Achieve PPP Structures

– Achieving a shared realistic view of the project fundamentals

Private sector expect returns related to country risk which often seem unacceptable to governments Private sector’s motivation can sometimes be conflicting with long term goals (short term construction contracts) Political “will” is often reluctant to admit that some projects do not meet the minimum macro economic returns Independent advisors or institutions could help reaching a common view Cross fertilization through global associations of governments

• r conferences are good but not sufficient

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• 5. CONCLUSIONS

– Lessons can still apply to many regions of the world other than Asia – It is difficult to generalise as each country in Asia requires a very specific approach and the PPP process is variably developed throughout the region : it makes it an onerous exercise to develop PPPs in the whole region – Both private and public sectors would see great benefits in cross fertilisation and standardisation of practice throughout the region

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