Considering Urban Rail PPPs - An Overview Cledan Mandri-Perrott Manila, 23 March 2010

1. FEU Financial Solutions Group Considering Urban Rail PPPs - An Overview Cledan Mandri-Perrott Manila, 23 March 2010

2. Major Themes in Developing Urban Rail PPPs • Incorporating PSP into urban rail • Contractual Arrangements • Procurement • Understanding and allocating risk • Bankability, Funding and finance • Conclusions PART 1 PART 2 PART 3

3. Part 1 - Incorporating PSP,Contractual arrangements & Procurement

4. Urban Rail PPPs – Some General Observations • Urban Rail PPP projects are challenging • Capital intensive; typically need public support (capital and/or operating subsidy); potential for significant contingent liabilities • Powerful (and often predatory) interests are involved i.e.: rolling stock suppliers, construction firms, real estate developers • PPPs have often proved unstable or poor value for money • Middle Income Countries are increasingly looking to Urban Rail and PPP transit solutions • Decision to pursue Urban Rail and PPP often made without proper feasibility study (eg transit options and VfM analysis) • Sometimes Urban Rail PPP projects are among a governments’ early attempts at PPP • Mistakes have been repeated with serious consequences • Unsuitable risk allocations (developing and developed countries) • Poorly structured projects, procurement processes and implementation • Failure to integrate Urban Rail projects into transport/transit policy (eg pricing / subsidy of competing modes)

5. What issues do we need to think about? Methods and options for PPP Understanding of finance issues that typically occur in UR PPP projects Understanding of common public transport policy issues Local, Regional and National Decision Makers Understanding of procurement processes and issues encountered on previous UR PPP projects An appreciation of past mistakes and common pitfalls Knowledge of typical UR PPP contracts and their financial , structural and risk related implications Knowledge of risks, their implications and common allocation issues Awareness of UR specific technical issues

6. Conducive framework for PPP Value for Money Having the right team – advisors 1. Incorporating PSP into Urban Rail

7. Conducive PPP Framework

8. Key VfM drivers include: Optimum risk allocation between parties Focus on whole life cycle costs Use an outputs specification approach Rigorously executed risk transfer Sufficient flexibility Sufficient incentives within procurement structure Sufficient skills and expertise in both public and private sectors Managing scale and complexity – keeping costs in proportion to project size PPP Must Offer Good Value for Money

9. Consider appointing advisory team early on: PPP projects are complicated to structure, bid and negotiate – need legal, technical and financial expertise Need to have a bankable project to bid out – especially in credit crunch environment Desire to capture best market practice Reputable advisors can give project market credibility Having The Right Team

10. Single integrated concession or layered arrangement: Design and construction Rolling stock and systems Operation and maintenance Does grantor have capacity to integrate? Does layering work under procurement legislation? 2. Developing the Contractual Arrangements

11. Design Performance Management System linking performance to compensation: Develop Key Performance Indicators (KPIs) Punctuality and reliability Customer satisfaction Cleanliness and general facility maintenance Access and security Determine weightings for KPIs Determine penalty levels for KPIs (performance targets, penalty thresholds) Determine maximum penalty amounts Performance Management within the Contract

12. Typical Contractual Arrangements in Urban Rail PPPs

13. Selection method: Competition Economy and efficiency Integrity and fairness Transparency 3. Procurement Issues

14. Appoint advisors (financial, technical, legal) Alternatives analysis for corridor, feasibility study, outline engineering design, ridership forecasting Market sounding Project Website EOI/pre-qualification: Preliminary Information Memorandum Road show PQ criteria and evaluation (eg construction and operation/PPP experience – of consortium or SPV, financial robustness, project financing experience) Bidding/RFP process: Data Room, stages and timetable, bidder interaction, form of bid (technical, legal, financial proposals), bid evaluation process/procedures Unsolicited Proposals Managing the Bidding Process

15. Part 2 – Understanding & allocating risk in urban rail pppS

16. 4. Urban Rail PPPs – Risk issues • Identify key risks: • Technical • Financial • Legal, environmental/social, operational • Political – during bidding, design, construction, and operation • Developing comprehensive risk matrix • Risk principle: “Allocate all risks according to which party can best manage them”

17. Technology/policy risks include: Intermodal integration – linkages with buses, metros, private vehicles Ticketing, barriers and fare setting – linkages with other modes of public transportation, need for flexibility Line/network extensions Land, utilities, approvals Key Risks in Urban Rail PPP: (a) Technology/policy risks

18. Intermodal integration: Bangkok Failure to link bus, private vehicles, metro and LRT 12 different agencies responsible for transportation, Ticketing, barriers and fare setting: St Petersburg Separate ticketing for metro, buses and proposed LRT PS acts as collection agent (no incentive to maximise ridership) Ticketing, barriers and fare setting: Singapore Integrated ticketing across transportation modes Passenger convenience Examples Technology/Policy risks (1)

19. Line/network extensions: Manchester: First right of refusal to incumbent Developer Failure to agree terms with incumbent Early termination of PPP agreement Costly for public sector (buyout of future profits!) Land and utilities: Edinburgh warranted all utility locations Lagos: Land rights not fully resolved St Petersburg: no warranty for utilities was major bankability risk Examples Technology/Policy risks (2)

20. Approvals (design, construction & commissioning): St Petersburg: Federal & City approvals required City refused to provide protections against its own approving agencies (increases delay & cost risk if non approval) City refused to warrant reference design Commissioning risk was mitigated by acceptance of third party decision (independent engineer) Examples Technology/Policy risks (3)

21. Financial risks include: Economic/financing risks – interest rate, foreign exchange, inflation (during bidding, construction, operation) Farebox/ridership risk – with private sector, shared (minimum revenue guarantees), with public party (availability payment) Payment risk – Grantor creditworthiness, affordability, public budget allocation process, guarantees Key Risks in Urban Rail PPP: (b). Financial Risks

22. Economic/financing risks: Manila: FX risk born by public sector (construction and operation) Bangkok: FX depreciation caused significant increase in project costs to private sector, impacting commercial viability (due to financing in US$) Vancouver & Kuala Lumpur: financed in local currency Gautrain: public sector assumed FX risk during construction Good practice suggests allowance for pass through of inflationary costs Examples of Financial Risks (1)

23. Farebox/ridership risk: Bangkok & KL: ridership risk with private sector Gautrain: shared risk through minimum revenue guarantee London Docklands: public sector risk through availability payment Examples of Financial Risks (2)

24. Payment risk: Grantor creditworthiness: Lagos State (limited asset /income base) Affordability of scheme (grantor / users): Fares are affordable: Gautrain (cheaper than alternative modes of transport) Amount of public subsidy / Contingent liabilities: Russia (financial crisis has reduced public available budget) Public budget allocation process: Multi year budgeting of capital grant/subsidy: Russia Guarantees to cover payment risk by public sector Vancouver: state and federal backing Examples of Financial Risks (3)

25. Legal, environmental/social, operational, risks include: Basic legal investor protections expatriation of profits, dispute resolution, arbitration, change in law/standards, enforceability, import/export restrictions) Environmental: noise pollution & vibration /protection measures, special waivers Social: resettlement and compensation, public consultation processes Operational: changes in operating patterns, special events/compensation Key Risks in Urban Rail PPP: (c). Legal, environmental/social, commercial

26. Political – during bidding, design, construction, and operation : Nationalization, new tax regimes, events that may affect debt service and profits Acts of war, rebellion, etc Regulation eg new standards, introduction of competition Key Risks in Urban Rail PPP: (d). Political issues

27. Developing comprehensive risk matrix egSt Petersburg LRT Risk Allocation

28. 5. Bankability in Urban Rail Projects • Urban Rail PPP projects are challenging and Capital intensive; typically need public support (capital and/or operating subsidy); potential for significant contingent liabilities • Powerful (and often predatory) interests are involved ie: rolling stock suppliers, construction firms, real estate developers • PPPs have often proved unstable or poor value for money • Keep four factors in mind: • Is project affordable and creditworthy? • Provides value for money (VfM)? • Uses a legally robust structure? • Risk allocation is in line with local/international practice?

29. Funding arrangements are complex

30. Implications of private finance - 1 • Remember private capital comes with an expectation of a reasonable return: • Demonstrate how private investors will recover normal returns throughout project development and implementation • Consult with banks and other lenders early on in the bidding process to ensure adequate due diligence, project transparency and quality • Calculate levels of debt/equity projected to be required • Market test project with potential developers/investors

31. Implications of private finance - 2 • Consider potential revenues and benefits that can be derived from outside the operation of the system eg: • Land usage • Advertising revenues • Parking facilities etc • Commercial retail development • Does the project require public support? • Consider if capital grant is required • Is operational cash flow support required, e,g, availability payment or minimum revenue guarantee? • Is guarantee required, e.g. municipal, state or sovereign, IFI, partial risk/credit?

32. conclusions

33. Determine the project’s bankability • Consider the bankability of the project by exploring and understanding the: • Creditworthiness • Legal viability • Economic viability • Technical viability • Determine the suitability of project finance or corporate finance for your project needs • Understand the implications that the project’s structure (policy, technology and commercial) will have on funding and finance sources

34. Managing contingent liabilities • PPPs will create contingent liabilities: • Direct government obligations eg capital grant and availability payment • Indirect through government guarantees, contract assurances etc • Contingent liabilities associated with guarantees should be priced into and VfM analysis and be disclosed • Ensure proper budgeting mechanisms are utilized to allow for sufficient cover for contingent liabilities • Policymakers must carefully consider the implications that different sources of public funding have on transportation planning functions and incentives for budgetary responsibility and discipline

35. Planning for financial obligations • Planning for financial obligations: • Use of special reserve accounts to cover expenditures and capital investment required to maintain the system’s integrity and condition over an extended period • Ensure good asset condition for handover at end of PPP term; agree price to be paid for such assets (if any) • Explore the use of hedging instruments to assist in the management of the financial risks associated with specific liabilities

36. Running the PPP agreement / contract • Plan the manner in which you will monitor and enforce the contract: • Its not just about signing the PPP agreement • Need to develop and retain capacity for managing project implementation (construction, commissioning and long term operation of a major transportation project) • Manage change of circumstances given long term nature of contract • Ensure concession contract contains scope for refinancing opportunities that may be in both public and private sector interest

37. Other considerations • Need to consult with potential bidders/ investors and lenders (risk appetite, likely lending terms – tenor, pricing, etc) • Property development/air rights • Will IFIs be involved (EIA, safeguards, procurement) – think ahead • Tax concessions – holidays, duty exemptions • Hire an experienced transaction/financial adviser familiar with PPP projects to assist in the marketing and financing of the project