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CURRENT ENVIRONMENT: BANK DEBT CONDITIONS REMAIN RESTRICTIVE

FINANCING OF PPP’S: LESSONS LEARNT IN THE LAST 18 MONTHS… AND BEFORE Enrique Fuentes, Development Director Ferrovial Chairman PPP Workgroup European International Contractors PPP Days Asian Development Bank Manila, March 2010. CURRENT ENVIRONMENT: BANK DEBT CONDITIONS REMAIN RESTRICTIVE.

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CURRENT ENVIRONMENT: BANK DEBT CONDITIONS REMAIN RESTRICTIVE

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  1. FINANCING OF PPP’S: LESSONS LEARNT IN THE LAST 18 MONTHS… AND BEFOREEnrique Fuentes, Development Director FerrovialChairman PPP Workgroup European International ContractorsPPP DaysAsian Development BankManila, March 2010

  2. CURRENT ENVIRONMENT: BANK DEBT CONDITIONS REMAIN RESTRICTIVE Loan Market • Market strongly focused in refinancing / re-structuring • Bond markets have become an alternative for loan financing • Around 55% of loans refinanced in 2009 done through bonds Pricing &Structures • Conditions in the loan markets have shown first signs of easing • Market still focused in short term, but 5 year tenor is back for some good rating corporates • Pricing is tightening but still well above pre-crisis maximums, and increases considerably with maturity • Typical structures: short term with specific take-outs and step-up pricing Banks – Current Situation • Liquidity has increased but Banks’ balance sheets are still highly leveraged • Uncertainty about removal of support measures press liquidity prices up and maintain risk aversion • Underwriting appetite in the loan market is still low but improving ACCESS TO BANK LENDING RESTRICTED FOR PPP’S (specially riskier ones: i.e. greenfields)

  3. CURRENT ENVIRONMENT: BOND MARKET IMPROVING, BUTNOT APPLICABLE TO MANY PPP’S • Bond margins have decreased, but are still above pre crisis highs • Low interest rates compensate margins (for now) • but less so in longer tenors, which are the ones needed for PPP’s • Yield differentials between 10 and 30 yrs 407ETR bonds well above average • Reduction in long term interest rates much smaller than in short term • Bonds are a difficult instrument to fund PPP’s (particularly riskier ones) • No certainty of funding at time of committed offer • Disappearance of monoline insurers • Requires combination with bank bridge financing Δ risk & cost of financing Source: Merril Lynch: European bond market report, March 2010

  4. CURRENT ENVIRONMENT: EQUITY LOOKS ABUNDANT BUT WITH CONDITIONS • Limitations of traditional developers to maintain the rythm of investment • Access to debt • Equity markets still difficult for raising capital • Increasing importance of pure financial investors • Infrastructure funds: “dry powder” in existing funds: US$ 71,5 Bn • … of which US$ 21,4 Bn are allocated to European assets • Increasing interest from final investors (Pension Funds, Sovereign Funds, Family Offices) in investing directly in assets • Financial investors have specific issues regarding risks and return • Averse to construction and significant operating risk • Brownfields preferred to greenfields • Association with traditional developers to mitigate those risks • Significant equity IRR requirements (above 12% for mature projects) • Require not only IRR but also cash yield • Limitations on debt capacity • Higher project IRR’s • In many cases, limitation on maturity • Most infrastructure funds have tenors of no more than 15 yrs • Require absolute transparency and predictable regulatory frameworks • … and are in a position to compare internationally • Potential development of a secondary market in which projects promoted by traditional developers are sold, when mature, to financial investors

  5. RECENT EXPERIENCE: NORTH TARRANT EXPWY (NTE), TEXAS, 2010 • Reconstruction of 21 Km. of highway, adding 4 tolled express lanes • 52 yr concession • Total construction Capex above US$ 1.8 Bn • Paid by tolls • Fully electronic • Escalation linked to capacity utilization and avoidance of congestion • Concession conditional to financial close • Substantial support for the financing • TIFIA loans (soft loans provided by US DoT) • 35 yr tenor • 10 yr interest capitalization • “soft” interest: 40yr UST Bond + 0.01% • Tax exempt Bonds: interest is tax deductible for holder • Cuts interest rates by 100 – 140 bp • Subsidies Total = $2.1 billion

  6. RECENT EXPERIENCE: A1, POLAND, 2010 • Construction of 96 Km of new highway and refurbishment of 84 Km of existing highway (total: 180Km) in main North – South corridor • 35 year concession (conditional to financial close) • Toll Road, but with traffic risk mitigation (availability payments) • Total Construction investment: €1.4 Bn • Innovative financing support by EIB: Loan Guarantee for Trans European Networks, subordinated credit facility to cover revenue shortfall • Availability: 5–7 years after completion • Can repay senior debt to improve Cover Ratios and allow refinancing • Despite support, no financial close: project & risk too big for markets • Availability of Commercial debt and EIB & EBRD project facilities insufficient to cover required debt • EIB could only provide shortfall through Government facilities • FX risk was key: financing in € vs revenues in PZL

  7. STRUCTURAL ISSUES: PPP’s IN EMERGING COUNTRIES GROW RELATIVELY SLOWLY Investment commitments to infrastructure projects with private participation in developing countries, by country Source: World Bank and PPIAF, PPI Project Database. • Unadequate regulation • Unadequate risk / return: both political, commercial & financial • Succesful PPP’s in ECA area: average of 4.5 yrs to financial close!

  8. …PARTICULARLY IN TRANSPORT & WATER Investment commitments to infrastructure projects with private participation in developing countries, by sector 2008 US$ billions • … which have specifities which affect risk • Regulated tariffs • Very often, full transfer of demand risk Source: World Bank and PPIAF, PPI Project Database.

  9. ADAPTING PPP’S TO NEW REALITY • Reduce risk: PPP’s do not finance the projects Governments want, but those acceptable to private sector & financial markets • Focus of Government should be to mitigate risks that the market cannot assume at reasonable costs • Role of multilaterals should be to advice on risk/return acceptable to markets and to provide financing and risk coverage • Co-operative approach with multilaterals to design risk coverage tools • FX risk!!! • Maximize competition and focus it in project IRR and in quality and efficiency • “Evolutionary” approach: risk coverages decrease as experience and development of the country increase • Focus on efficiency • Private Party should be given flexibility, under clear legal framework based on performance indicators, to run the project efficiently • Management of initial investment and of ongoing Opex & Capex • Easier to fund smaller projects: reduce investment & funding • Combination of public & private funding • Imaginative use of Govt guarantees or funding allow to maximise “leverage” of public resources

  10. ADAPTING PPP’S TO NEW REALITY • Bidding process: certainty of financing no longer exists • Avoid long post preferred bidder phases (obtain approvals before) • If not possible, introduce flexibility to re-adjust conditions • Adapt projects to international financial investors standards • Transparent regulation and consistent behavior of granting authority • Change orders • Delays in payments • Tariff escalation • Resolution of conflicts • Regulation should facilitate financing: creation of guarantees, step in rights, change in ownership • Combine user paid schemes with risk mitigation • May allow for efficient pricing of the public service • Create alternative to traditional taxation • Where tax revenues can be unreliable, user paid schemes may end up being more attractive financially • Risk can be mitigated through minimum revenue & other clauses

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