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CaRTS and CaRDCo New Financing Concepts for Transport Infrastructure Cambridge Futures 2 Conference Marriott Hotel, Hun PowerPoint Presentation
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CaRTS and CaRDCo New Financing Concepts for Transport Infrastructure Cambridge Futures 2 Conference Marriott Hotel, Huntingdon 18th February 2002. Responding to the Caborn Challenge . Private sector agitation County Council lobbying successful Whitehall listening

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slide1

CaRTS and CaRDCo

New Financing Concepts

for Transport Infrastructure

Cambridge Futures 2 Conference

Marriott Hotel, Huntingdon

18th February 2002

Cambridge Futures 2 Conference - 18th February 2002

responding to the caborn challenge
Responding to the Caborn Challenge
  • Private sector agitation
  • County Council lobbying successful
  • Whitehall listening
  • £2+bn bill of fare prepared
  • Has to involve private sector
  • How do we respond to the “Caborn Challenge”?
  • Consider 2 aspects - sources of finance, especially PFI

- legal structures, especially ownership

  • Concepts at this stage - much financial and legal analysis yet to be done

Cambridge Futures 2 Conference - 18th February 2002

sources of infrastructure finance
Sources of infrastructure finance
  • 4 sources - taxation/rates eg schools

- existing private sector agents eg water utilities, housing associations

- Section 106 agreements

- Private Finance Initiatives/Public Private Partnerships

  • 3 caveats to applying PFI/PPP to Cambridge Project
  • Most public/private partnerships concerned with privatisation of existing assets/operations
          • Cambridge Project basically a start up
          • uncertain project costs, uncertain revenues
          • who is going to put up the equity?
  • Successful local businesses not a source
          • share rich rather than cash rich
          • shareholders focused on business objectives, not altruism
          • lively minds, but not cash
  • Considerable local personal household savings - not usually involved

Cambridge Futures 2 Conference - 18th February 2002

how does pfi work 1
How does PFI work? (1)
  • Extension of privatisation, combined with international project financing techniques eg power stations
  • Private capital put up to build new public facilities against long term “offtake” contract from public sector
  • Started with transport, but now extended to hospitals, prisons, ?schools
  • Uses private sector profit motive to improve efficiency
  • Risk transference - project construction risk

- operating risk

  • Profit capping mechanisms

Cambridge Futures 2 Conference - 18th February 2002

how does pfi work 2
How does PFI work? (2)
  • Transport project example eg Dartford Crossing
        • contracting consortium formed (contractor and operator)
        • fund feasibility study and bid
        • construction risk analysis
        • operating risk analysis: traffic forecasts and other risks
        • bidding process
        • 30 year concession granted for facility management
  • Payment mechanisms
        • tolls, actual or shadow, with tapering profile
        • shift to mean journey times, availability and safety related payments
  • 3 way funding negotiation between consortium, government and banks
        • 75/85% initial finance from bank senior debt
        • banks during construction, then bonds < 30 years
        • the “equity plug” needed to fund feasibility/bid and “first loss” cover for banks
        • consortium aims to minimise its “equity plug”

Cambridge Futures 2 Conference - 18th February 2002

ownership private company model 1
Ownership - private company model (1)
  • Joint venture consortium company formed by providers - usually construction contractor and facility operator
  • Put up the “equity plug”
  • Joint interest in maximising return for shareholders on smallest equity plug in shortest time
  • 3 potential areas of profit to share
          • construction contract margin
          • post-construction refinancing profit (lower risk, lower margin)
          • operating profit
  • Gain from managing transition from higher to lower risk
  • Resell equity ownership of completed project to institutions

Cambridge Futures 2 Conference - 18th February 2002

ownership private company model 2
Ownership - private company model (2)
  • Profits accrue to owners of “equity plug” ie consortium venturers’ shareholders
  • Profits of each project paid away rather than retained
  • Leads to fragmented, project by project approach
  • Private sector looks for “pregnant” opportunities, rather than continuous development
  • Development depends on succession of “pregnancies” to create fresh PFI awards from central government
  • Local role remains lobbying for PFI awards from central government
  • Railtrack dividend issues
  • Public governance operates only through concession contract

Cambridge Futures 2 Conference - 18th February 2002

ownership the mutual model 1
Ownership - the mutual model (1)
  • Can we structure commercial ownership of “equity plug”by local users?
  • Set up new Industrial & Provident Society - Cambridge Regional Transport Society (CaRTS)
  • Would bid for PFI contract and procure bank finance, construction contract and operator services
  • How to raise the “equity plug” to fund bid?
  • Most mutuals accrete equity over time, but in principle can do an IPO
  • Offer securities call Permanent Interest Bearing Securities (PIBS) to regular users of service
        • rateable and tradeable perpetual security, but callable
        • coupon ~ 7.50 %
        • subordinated to senior bank debt, but ? coupon deferable
        • no ownership concentration: one member one vote
        • legal ownership inalienable, but beneficial ownership “strippable”
        • can be held by corporate persons
  • IPO could also offer embedded membership rights eg annual season ticket discounts

Cambridge Futures 2 Conference - 18th February 2002

ownership the mutual model 2
Ownership - the mutual model (2)
  • CaRTS guided bus example
          • project cost ~£50/60m
          • lowish risk ~ £40m bank/bond debt possible
          • “equity plug” ~£10/20m required
          • PIBS issue to raise 10 - 20,000 x £1,000
          • offered to public in Cambridge
          • ?ISA-able ~ worth 10+% gross with lifelong season ticket discount
          • ?coupon deferred until after construction
          • investors able to resell stripped coupon once project rated
          • offered to University, colleges and employers for season ticket concessions for employees
          • ?include provider interests eg Anglian Water
          • ?embedded board membership for County Council vs assignment of S.106 benefits “down the track”
          • ?50% of board and Chairman elected by users

Cambridge Futures 2 Conference - 18th February 2002

ownership the mutual model 3
Ownership - the mutual model (3)
  • Pro’s and cons
        • enable profits to be retained and re-used for continuous development
        • provide development vehicle under local control
        • maintain efficiency of private sector without shareholder vs user conflicts
        • close identity of users and investors may not apply so easily elsewhere eg roads with public access
        • speed of retained earnings build up vs scale of Cambridge Project (but S.106 injection possibilities)
        • local investor capacity
  • Not the only answer, but part of possible mix

Cambridge Futures 2 Conference - 18th February 2002

ownership public private partnership
Ownership - public/private partnership
  • Alternative model of company limited by guarantee, with dual public and private board - ?Cambridge Regional Development Company (CaRDCo); like New Railtrack
  • Usually used for long term or charitable purposes, beyond potential members’ horizons
  • ? Accountability issues - members chosen by board
  • ? PFI programme management role
  • But ability to act as procurer depends on coming up with “equity plug”
        • ? EEDA and other grants;
        • ? S.106 proceeds;
        • ? other asset injections
  • Potential to blend elements of mutual and PPP approaches
  • Another part of mix

Cambridge Futures 2 Conference - 18th February 2002

potential pattern of funding
Potential pattern of funding?
  • Gas and electricity works £45m TXU/Eastern
  • Water and waste £55m Anglian Water
          • CHUMMS £300m Private PFI
          • ?Transport deficit £90m ?Tax
          • Local roads £360-400 ?CaRDCo PFI
          • Public transport £50/60m CaRTS PFI
          • Market town allowances £25m Tax
          • Contingency £160/175m Tax
  • Health £352m ?CaRSH/ CaRDCo/ Private PFI
  • Education £155m ?Tax/CaRDCo/ Private PFI
  • Community £68m Tax
  • Housing £360m Housing Assocs

Cambridge Futures 2 Conference - 18th February 2002

conclusion
Conclusion
  • Cambridge’s economic success “home grown”
  • Ignored by central government when growing
  • Then challenged to sort out our problems too
  • Sense of responsibility to respond to the challenge
  • Must create mechanism to capture local return off our own success, rather than see it go back to central government or to remote institutional shareholders
  • Prize will be greater ability to steer our own futures
  • Mutual I&PS - CaRTS - and Private/Public Company limited by Guarantee - CaRDCo - may offer that mechanism
  • Owe it to ourselves to try

Cambridge Futures 2 Conference - 18th February 2002