November 2015Zac Kerr – Partner

+61 422 412 429 zkerr@millsoakley.com.au

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• Presentation to cover:

• An overview of Transport Infrastructure Projects, including particular characteristics relevant to Africa

• Financing options and challenges

• Toll road specific issues

• Airport specific issues

• Rail specific issues

• Port specific issues

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• Spectrum of Transport Infrastructure projects

• Basic Transport Infrastructure project structure

• Key risks and allocation of risks, particularly in Africa

• Key issues that arise internationally on Transport Infrastructure projects

• Viability Gap Funding and structuring issues

• Lifecycle approach to Transport Infrastructure projects

• General market conditions

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• Economic Infrastructure (eg. toll road, airports)

• Social Infrastructure (eg. schools, hospitals, prisons, availability/annuity roads)

• Hybrid (stadiums, carparks)

• Key distinguishing features• payment structure

(availability-v-patronage)

• market risk• risk allocation• government role

• Not always a clear distinction between economic and social

Key features typically include:• provision of a service rather than

an asset• long-term (typically 25+ years)• involves a whole of life focus• payment for service (either from

Government or users)• non-recourse project finance

Service Contract/

Traditional procurement

Management

Contract

Lease/

Affermage

BOOT

DBFO

BOT

Concessions

Privitisation

PPP’s

LRT 1

O&M

NAIA

Expressway Phase II

New Boho/Airport

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• There is no set structure. However, typically the following elements are involved.

State

Project VehicleFinancier

Equity Investor

D&C Contractor

Equity Investor

O&M ContractorD&C Parent Company

Parent

Company

Guarantee

Interface

Agreement

O&M Parent Company

Parent

Company

Guarantee

Project Deed

Site Licence/Lease

Independent Reviewer Deed

Financier Tripartite Deed

Shareholders

Agreement

Financier

Tripartite

Deed

D&C Contract

Parent Company Guarantee

Sub-licence

Independent Certifier Deed

O&M Contract

Parent Company Guarantee

Sub-licence/Sub-lease

Contractor

Side

Deed

Financing

Agreements

Financier Tripartite

Deed

Contractor

Tripartite Deed

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• Underlying principle is that the parties allocate risk to the party best able to manage that risk. i.e. control its occurrence and consequences.

• Risk allocation is driven by market precedent and the motivations of each participant

Government risk

• ROW

• Planning

• Political Force Majeure

Project Vehicle risks

• Design

• Construction

• Operation

• Maintenance

• Finance

• Patronage (?)

Shared risk

• Non-political Force Majeure

• Patronage (?)

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• Political will for the project and public scepticism• Strong central bodies/agencies• Need for early projects to be a success from a political and also future

investment perspective• International precedent (usually amalgamation of different markets)

used as legal / commercial basis but public sector also looking to set favourable national precedents

• Bankability issues (i.e. where are the banks situated? What risks are they generally comfortable with?)

• Willingness of the public sector to take on appropriate risks to encourage greater private investments

• Lack of experience with Transport Infrastructure projects / process so both the private / public sector will require training / expert advisors

• Evolutionary process• Each of these issues can at least partly be addressed by participation of

IMF, World Bank, ADB and other organisations, including multilaterals from participating countries.

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• Issues relevant to varying degrees in African jurisdictions include:

• Timetable

• Certainty of legal framework

• Enforceability, including rule of law and certain property rights

• Depth of finance

• FDI restrictions

• Liquidity of capital markets

• Exit strategy

• Sovereign risk

• Depth of market for head contractors, consultants, subcontractors

• Political stability over time

• Corruption

• Pipeline – procurement process

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• Increasingly important role in Transport Infrastructure Projects

• Process designed to ensure value for money for the State

• VGF can have different forms and timing

• For example:

• VGF could be contributed at completion of construction, delivers greatest risk transfer, but at higher cost

• VGF could be contributed contemporaneously with debt draw downs, reduced cost, but less efficient risk transfer

• Government recourse to project typically subordinated to financiers

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• Transport Infrastructure PPPs often more competitive than direct State delivery over lifecycle due to better planning, more rigorous costing and incentives to continuously improve D&C and O&M delivery

• Concession and O&M arrangements will frequently be hardcoded, inflexible to changing demands over time

• Components of projects may have differing effective lives (eg above and below rail infrastructure)

• There are mechanisms that can be included in contracts to facilitate changes, but never as flexible as public delivery

• GFC • Natural disasters• More cautious bidders which leads to greater due diligence• More cautious financiersFunding sources in Global PPP’s 2005 – 2010Source: Infrastructure Journal

0

10

20

30

40

50

60

70

80

%

2005 2006 2007 2008 2009 2010

Debt

Equity

Grant/subsidy/IFI loan

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• Typical project lender concerns

• Options and challenges in the international market

• Current debt market for Transport Infrastructure Projects

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• Certainty of project cash flows to meet debt service requirements

• Creditworthiness of public-sector proponent

• Effectiveness and enforceability of Project Deed / Lease and related agreements

• Lender ability to step-in in the event of project failure and availability of alternative contractors

• Ability of contractors to perform and quality of their management

• Creditworthiness of contractors and quality of contractor guarantees

• Project risks that are understood, controllable, finite and appropriately allocated

• Reputation (environmental, social)

• Effectiveness of insurance cover where needed

• Ability to ‘reflect’ security over project assets

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• Attracting and assessing the various funding sources available

• The available tenor and pricing of the debt relative to the term of the project

• Refinancing risk

• Availability of full term currency and interest rate hedging (to the extent required), preferably in one currency – swaps generally becoming very difficult area

• Risk appetite of the financiers

• Ability to take security over land, entities, contracts and other assets

• Compliance with Equator Principles (to the extent relevant banks are signatories)

• Compliance with global KYC, prohibited act and other requirements –creates risk that US/EU requirements change and must be complied with notwithstanding that this does not invoke change in law protection in project jurisdiction, which could then trigger project termination

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• Availability of export credit finance

• Single borrower limit / aggregation

• Sophistication of the financiers, availability of financier personnel with infrastructure skillset

• Sovereign risk and degree of finance/refinance risk share with Government

• English, US or EU law and binding international arbitration will often be mandated due to lack of confidence or familiarity with the laws and courts of the project jurisdiction

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• Market has improved but not fully ‘normalised’ and certainly not back to pre-GFC (2007) levels:

• seeing some limited underwriting – it is bridging the gap on bigger deals and we are seeing some appetite for underwrites on smaller deals

• pricing has come back from 12-18 months ago but not back to pre GFC levels – downward pressure on margins – often inconsistent pricing from different banks, and can take very long time for credit approvals

• tenors have moved out (Asian jurisdictions moving towards 10–15 years)

• capital markets may be considered, but do not appear to be a viable alternative to bank debt as yet

• ECA Finance is a potential alternative, but only for suitable projects and contractors, and will likely be assisted by ADB involvement

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• Equity story is a key issue for banks (and the Government)

• change of control issues are typically heavily negotiated

• aggregation continues to be an issue, with many banks having different positions / internal requirements

• possibility of equity underwriters for larger deals

• Assignment/sell-down of debt continues to be a major issue

• assignment to hedge funds etc

• interface with the Government’s requirements for sell-down/ consent rights

• Availability of tax structuring still a key determinant

• Availability of early depreciation

• Ability to minimise withholding tax

• Ability to minimise push back on “tenure” taxes (e.g. stamp duty)

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• Providing expertise and advisers, loans and loan guarantees

• Organising and arranging further expertise and advisers, commercial loans and ECA backed loans, arranging viability gap funding

• Providing advice to and interface with domestic institutions

• Political risk insurance

• Environmental and social safeguards

• Rectifying market failure to ensure private sector can competitively meet infrastructure demand where characteristics of jurisdictional institutions and practices do not otherwise permit

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• Traditionally the government has required private sector to rely on user-pays revenue streams (e.g. tolls) and thereby take demand/patronage risk

• S&P Traffic Forecasting Risk Study (2005)

• Average 20-30% over-estimation of year 1 traffic

• No evidence that forecasting error significantly reduces during first 5 years of operations

• Study by Li and Hensher (2010)

• average 45% over estimation of year 1 traffic

• average 19% over estimation after 6 years

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• Availability payments/annuity• UK• India• Australia

• Typically incentivises active management of:• availability of lanes• congestion• safety• environmental factors

• Does not solve funding issues for Government

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Patronage risk is bankable in certain circumstances – need to reduce incentives for optimism bias by implementing structure which results in reasonable allocation of risks, eg:

• Minimum revenue guarantee

• Chile

• Korea

• Revenue shortfall loan

• India

• Concession period adjustments / Least Present Value Revenue

• India

• Australia

• Chile

• Hybrid

• Canada, Portugal

• Split of PPP and concession to toll24

• Not just limited to new roads• reversal of ‘traffic calming’• public transport

• Timing of projects in market• Vietnam and India both looking

to tender out highways in packages

• Challenges where multiple projects are overlapping, competition for skills, capital, attention, etc

• Consider timing of both early and potential subsequent packages

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• Land, approvals and environmental risk: related to ability to secure the land and approvals necessary to construct and complete the road and manage any environmental issues that may arise.

• Network interface: linked with demand risk. This relates to what may arise due to the inter-relationship between the road and the surrounding network, including the impact of changes to key feeder routes, changes in the nature of traffic and construction of new roads.

• Sovereign, legal and regulatory risk: includes issues relating to ability to increase tolls/changes in laws and enforcement.

• Operational risk: including the developing trend in many recent projects where the private sector has been required to meet detailed operational standards/KPIs.

• Inability of borrowers to provide Security: Borrowers must have the capacity at law and must not be restricted by Government in being able to provide security over the project (including relevant land, materials, contracts and entities) to financiers who provide debt for the road project.

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Key features

Road name: BR-101

Financial Close: 2012

Project type: expansion of existing motorway, doubling and installing new toll stations on 475.9km of the present carriageway, the construction of 21.6km of side roads, installation of pedestrian walkways and 30 speed control devices

Sponsor: Rodovia da Vitoria consortium (EcoRodovias 80% and SBS Engenharia e Construcoes 20%)

Funding: Overall concession is USD1.21 billion. The Brazilian Development Bank to provide up to 80% of investments in the first 6 years of the concession, with 60% linked to the long term interest rate and 20% to inflation

Demand risk: Traffic risk borne by Project Vehicle (brownfield elements (?)

Term of Concession: 25 years.

Key features

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Key features

Road name: Antofagasta Highway

Financial Close: 2011

Project type: Upgrade and expansion of existing tollroad, with the construction of 120km of new lanes and upgrade of 200km of existing lanes, service roads and intersections

Sponsor: Consortium (Skanska 50% and Investment Fund Las Americas 50%)

Funding: Unknown

Demand risk: Traffic risk borne by Project Vehicle (brownfield)

Term of Concession: 20 years with Skanska responsible for construction and management

Key features

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Key features

Road name: Western High Speed Diameter (Greenfields toll road within existing Brownfields highway)

Financial close: 2012

Project type: Construction of the central section of the road (as the government has already begun construction and funded the northern and southern parts of the road)

Sponsor: Northern Capital Highway consortium (OJSC Gazprombank & VTB Group)

Funding: Overall project cost approx USD4-4.7 billion. Debt funding of USD1.8 billion, equity of USD1 billion, and federal and local government grants of USD1.4 billion (approx. figures)

Demand risk: Minimum Revenue Guarantee

Traffic risk borne by Grantor - Grantor to compensate Sponsors if the project generates less than guaranteed revenues. Sponsors to pay to Grantor 90% of amounts in excess of guarantee

Term of Concession: 30 year concession, including construction of the 11.6km toll road, and O&M of the entire 46.6km highway

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• Access pricing• Competition–v-

Regulation –v- Contractual • Planning and regulations (eg.

curfews or traffic caps)• Competing facilities• Sustainability of traffic• External shocks

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• Airports in Asia have become more than transport utilities providing opportunities for retail, entertainment, logistics and conference facilities (see diagram). In HK and Singapore air-side services is now < 40% of revenue.

• This requires negotiation regarding development opportunities on land set aside for the airport or its related activities • increasing landside

opportunities• restrictions on the land set

aside for the airport site

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• Understanding capex requirements – typically lump capex

• Network – connections to and from the airport (e.g. busses, trains, roads etc) and proposed future connections to and from the airport

• Site ownership – need to understand who owns the airport site and what ownership or lease structure will be used

• Environment – the main concern here is fuel spills and the cost of clean-up

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• Similar to toll roads

• Net cost – typically involving a subsidy

• Gross cost – Availability/Annuity style hybrids

• A study of 44 Urban Rail Projects (Flysbjerg, 2007) found:

• Average difference to forecast patronage – 39.5%

• 75% of projects had actual patronage at least 25% lower

• Even with gross cost contracts – demand risk is still relevant (eg journey time)

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• Alignment

• ROW

• Access to infrastructure

• Road closures

• Challenges of construction in an urban environment

• Typical KPI’s

• Capability/performance (eg. trip time)

• Availability

• Ambience

• Network risks (eg. traffic lights, other transport systems)

• State of existing assets

• Electricity risk

• Labour issues

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• Generally similar to airports, except for freight aspect and often require longer tenure (eg 50-99 years)

• Freight ports also require integrated land-side logistical solution – port will often be controlled / regulated in common with rail, road or river infrastructure – intermodal hubs

• Bulk freight ports typically tied to key use (eg coal, iron ore) which needs revenue to be underpinned by key customers

• Distinction between bulk export ports and import ports

• Labour issues

• Environmental issues

• Competition and access issues

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• Key project variables

• Nature of project

• Size of capital expenditure

• Economic viability

• Nature of works

• Patronage risk

• Other issues

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• Solving the funding challenge is essential, particularly in Africa, public or private

• Debt and equity is available in stable jurisdictions for good projects which are well structured, although some constraints for larger deals

• PPPs likely to remain an important option for larger transport projects. The key is clever structuring by Governments to maximise their attractiveness and competitiveness

• Patronage risk is not dead – but new solutions may be required, particularly on greenfields projects

• Use of PPPs in below rail, airports and ports may continue to be limited due to strategic importance to owners of these assets, preserving flexibility to augment assets and systems to meet evolving needs

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DisclaimerThis PowerPoint presentation is intended to provide only a limited analysis of the subject matter covered. It does not purport tobe comprehensive, or to provide legal advice. Any views or opinions expressed are the views or opinions of the presenter, and notthose of Mills Oakley Lawyers as a Firm. Readers should satisfy themselves as to the correctness, relevance and applicability ofany of its content, and should not act on any of it in respect of any specific problem or generally without first obtaining their ownindependent professional legal advice.

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