The Greek Experience Providing Important Lessons for Road PPP Transactions in other Cohesion Fund Countries

John Deighton

Director, Private Finance

Halcrow Group

Conference 22-23 November 2006

Vilnius, Lithuania

Background

Greece started the development of PPPs in the early 1990’s.

Athens International Airport and Attiki Odos were the first two major PPPs.

Since Attiki Odos , the Greek State has worked very hard to eliminate some of the early problems encountered.

The current Greek Motorway PPP programme reflects this desire to improve the process.

• Thessaloniki Tunnel

• Attiki Odos

Greek Road PPPs

Halcrow has been involved in the following Greek PPP projects

• Attiki Odos

• Maliakos – Kleidi Motorway

• Thessaloniki Submerged Tunnel

• Corinth – Kalamata Motorway

• Ionian Motorway

• Corinth – Patras Motorway

Either as Banks’ Technical, Banks’ Traffic or Sponsor’s Traffic Adviser

• The lessons learned in Greece provide useful guidance to other EU Cohesion Fund countries considering PPP, such as Lithuania.

• This presentation provides some of the key lessons.

Utilising Cohesion Funds

We all know that we need good infrastructure to promote economic development.

We also know that until there is economic development often the projects cannot be made economically viable.

This creates a dilemma.

Attiki Odos

42% EIB Loan

9% Commercial Loan

16% Private Equity

33% State Grant

Attiki Odos Motorway

The PPP project was made viable by the injection of 33% of construction cost as a State Grant.

50% of this Grant was funded by the EU Cohesion fund.

Appropriate Risk Allocation

The original Attiki Odos Concession Agreement had inappropriate Risk allocation.

The negotiations to reach an acceptable balance of risk delayed the project implementation.

The latest Greek Concessions include a process allowing risk allocation to be discussed during bid stage.

The key lesson is that the Risk allocation should be appropriate from the outset.

Expropriation Delays

Archaeology Delays the Project

Delay in Power Cable Removal

Relocated Archaeology – A Success

Typical Risk Allocation

PROJECT OWNER

Expropriation

Environmental

Archaeology

Permits

Service Diversions

SPONSOR

Design

Construction

Weather

Ground Conditions

Financing

Involve the EIB at an early stage

Involve the EIB at an early stage

EIB are focused on supporting EU projects such as Trans European Networks (TENS).

EIB can provide advice on different financing structures.

EIB is owned by EU Members – it is your money.

EIB financing structures are evolving – do not assume what was valid last year still applies – check.

Think ahead about Syndication

Most projects require a number of Banks to participate through the Syndication process.

The Lead financial centre for PPP is London.

Although documents should be prepared in the language of the country of project delivery, consider from the outset having all documents also in English, the language of the PPP Banks.

This investment, at an early stage, will pay dividends later in the process and enhance the attractiveness of the project to Bank investors.

Avoid Legal Challenges to the award of the Project

Greece used to award Concessions on a Quality – Price basis.

This led to Legal challenges on the Quality marking.

Competence now only considered at Pre-qualification stage.

Concession Tenders now assessed purely on tender Financial model and on the lowest NPV for Operation subsidy required by the bidder.

Approach significantly mitigates risk of Legal challenge to the award of the project.

Why PPP ?

In Greece they originally used Cohesion Funds to build

Motorways under Traditional Procurement

Result was

• Design & Construction was awarded on lowest bids

• No consideration of whole life cost in design

• Delays, cost overruns, claims, often poor quality work

• Serious concerns expressed by the Cohesion Fund

• Brussels imposed international project management

Ongoing maintenance delegated to Municipalities through

which motorways ran but no extra money.

Result – Little or no maintenance

Why PPP ?

Attiki Odos changed the Greek Approach.

Contractors appreciated they were responsible for 23 years

Quality significantly improved

Whole life costing considered in the Design

Investments made in construction to reduce Operation costs

Operation carried out in line with highest European standards

Ongoing maintenance financial obligations “ring – fenced” in the Financial model

Stringent asset hand back provisions at the end of the Concession

And provided a way of delivering the project financially with limited state funding

Now adopted for all Motorway programme

Traditional Procurement

£

t

Capex

Operating & Maintenance Costs

This is what is

supposed to happen

Traditional Procurement

£

t

Capex

Operating & Maintenance Costs

This is what

actually happen

s

Cost & time overruns

PPP Costs

£

t

Capex

Operating & Maintenance Costs

Lenders Letter of Support with Bid

After the delays in closing the Attiki Odos transaction, the Greek Government now require a Lenders letter of Support to be submitted with the bids

This letter indicates that should the bidder be successful there will be no commercial arguments on financing the transaction and due diligence has been carried out on the project.

Advantages

• Faster process to Financial close , commencement and project delivery

• Tests project bankability

• Due Diligence check on Bidders model assumptions prior to bid

• Minimises State – Bidder negotiations after award

Disadvantages

• If there are delays between bid and award market conditions may change, successful bidder may be able to secure better terms than his contract with Lenders who supported its bid.

• From real experience Bid stage Due diligence is a nightmare – information is always provided late – need to shadow the bid team – and everything changes in the last 24 hours prior to bid submission!

Notwithstanding this, it looks like Letter of Support is now the way of the world in PPP transactions.

State Project Management

State project management is an essential ingredient.

The State needs a suitably qualified and experienced team to manage the Risks and administration allocated to it under the Concession Agreement.

Needs a powerful leader focused on ensuring that the obstacles to the success of the project are removed in the least possible time.

State Leadership

The Leader should not be politically appointed.

The Leader should command the respect of all political parties.

This mitigates the risk of State culpable project paralysis in the event of elections leading to a change of government.

This mitigates the damage to State PPP credibility and the financial contractual cost caused by change of project leadership.

State Project Management

State team need to actively manage:

• Expropriation

• Permits

• Archaeology

• Services relocation

• Interfaces with other adjacent projects e.g. Railways & Metros

And all the other State stakeholders affected by the project such

as other Ministries , Municipalities, elected representatives,

Public Utilities.

Although it will be inevitable there will be State culpable delays,

good State project management can keep these delays to a

minimum !

It is not just about construction !

Just as a PPP is about the whole life of a Project Construction + Operation.

The State Project Management team should be established for the whole life of the project Construction – Operation.

State Project Management during Operation is very important.

FINAL LESSON

FINALLY IF YOU WANT A REAL CHALLENGE

THEN PUT YOUR NAME FORWARD FOR…

Olympic GamesAn immovable Deadline

13/8/2004

Attiki Odos completed 24/6/2004

Just in Time !

Contact details

John DeightonDirector, Private Finance

Halcrow Group

Burderop Park

SWINDON

Wiltshire

SN4 0QD

United Kingdom

Email deightonjr@halcrow.com

Tel +44 (0) 1793 816296

www.halcrow.com

John Deighton, Director of the

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