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MILAN METRO LINE 5
Risk management in infrastructure
project
Stefano Gatti
Simone Mauro
Presented ByBARUN JIT MAITRA
PGDM-09-11/12
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Milan Metro Line 5 is an example of an ideal
application of project financing in the transportation
sector with an articulated contract structure that
creates a complete pass-through of risks from theSPV to the other project participants.
Mediobanca Banca di Credito
Finanziario S.p.A
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Abstract
The construction of the underground rapid transit system inMilan involves complex mechanisms of risk allocation(construction risk, operating risk, traffic risk) to the publicconcession authority (City of Milan) and the private concessionholder (Metro 5)
The case discusses the unique mechanism for determining theavailability fee that the City of Milan would pay to this privateconcession holder
We further examine the system of penalties built into the
Concession Contract to be charged to Metro 5
The case also analyzes mechanisms for transferring major risksto the Construction Contractor (a Temporary BusinessAssociation (TBA) made up of Metro 5's sponsors) and to the
Operator (ATM)
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Back Ground Date Event
1920s Initial ideas emerge regarding the creation of a public
transportation system linking Viale Zara and Viale Fulvio Testi
Early 1990s Tramline is built along Viale Fulvio Testi
1999 Initial proposals are advanced for building Line 5; City of Milan
plans the works
30 June 2003 Proposal is presented by Promoter Consortium for building
Line5
15 April 2005 City of Milan calls for tenders to award concession
17 May 2006 Concession is awarded to Promoter Consortium
16 June 2006 Concession Contract is signed between City of Milan and
Promoter Consortium
3 August 2006 Supplementary Contract is signed (Garibaldi Variant)
7 Sept 2007 Operations & Maintenance Contract is signed
23 Nov 2007 Construction Contract is signed
12 Dec 2007 Financial close
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Participants of the Project
SPV----- ------Metro 5 S.p.A.
Sponsors----- Ansaldo 24.6%,Astaldi 23.3% and
Torno 15.4% (Garbi Linea 5),
Alstom 9.4% ,AnsaldoBreda
7.3%,ATM 20%
O & M--------- ATM
Lenders------- Dexia Crediop, Mediobanca
Société Générale and WestLb
Grant---------City Of Milan
Trust---------- Concession Authority
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Description Of the Project
Line 5 will connect the Garibaldi railroad hub to the
current terminal of the Bignami tram line, following
a route that runs entirely underground for
approximately 6.1 km When fully operational, the projected maximum
transportation capacity of the subway will be
26,000 passengers per hour per direction
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The transportation system designed for Line 5 is a driverless
light urban railway on fully automated track.
The line will be staffed only by onboard agents, who will
handle passenger assistance, ticket control and
surveillance;
The platforms in every station will be completely isolated
from the tracks by a barrier of shatterproof transparentpanels, automatic doors and emergency exits for access to
railcars, minimizing risks of potential safety hazards
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The DBOT Concession Contract and
Supplementary Contract
The term of this agreement was 31 years and 9
months, including 56 months for the construction of
the Zara-Bignami stretch and 70 months for building
the entire metro line
Operations would begin with the functional section,
slated for delivery by 28 February 2011;
the Entire Line was scheduled to begin operations by
30 April 2012.
At the end of the Concession, the Holder would
transfer the project and rolling stock to the
Concession Authority
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Concession Holders Grants and Fees
The project would be financed in part by a state capital granttotalling approximately 233 million euro and a grant provided bythe City of Milan of approximately 62 million euro
the state capital grant would be paid by the Concession Authority
on a milestones basis within 30 days after these funds were actuallycredited
the grant provided by the City of Milan would be paid out by theConcession Authority within 60 days of presentation of milestonecertification
If delays in state grant disbursement resulted in delays of over 120days in the payment of a milestone certification, the ConcessionHolder would have the right to call for a revision of the BusinessPlan (BP).
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Availability Fee (AF) would be paid in full by the
Concession Authority if the actual number of passengers equaled or exceeded 32% of the
benchmark number (risk threshold)
--------7,711,200 for the operating period of the
Functional Section
------- 9,520,000 for the first year of operations
of the Entire Line
------ 10,080,000 for the following year;------ 11,200,000 after that.
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If the actual number of passengers (Pa) is lower
than the risk threshold (Pr), reduction in AF
AF = Tb*(Pt+Pa-Pr)
Pt ---the target number
of passengersTb ----for the benchmark
tariff
If the actual number of passengers is higher thanthe risk threshold,increase in AF
AF=Tb*Pt.
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Benchmark Tariffs
1.522 euro for Year 1 and Year 2 of operations;
1.422 euro for subsequent years of operations until
loans were repaid
0.650 euro beginning on the date that loans were repaid.
The Tb, to be applied in the first two years of operations,
would be revised on the basis of actual inflation levels
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Revision of the Concession
i) an act for which the Concession Authority or its
bodies may be deemed responsible ii) a violation by the Authority of obligations stipulated
in this Convention, or
(iii) an act, which causes a delay with respect to the
time limits resulting directly in the impossibility of the
Concession Holder to fulfill its obligations,
(iv) an act for which the owners and/or operators of
underground utilities and surface utilities may be
deemed responsible.
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force majeure, land reclamation or possible findings of
archeological or war artifacts -----------the BP would be
revised only if the incurred by the Concession Holderexceeded the single cumulative sum of 2 million euro.
Moreover, certain force majeure events were covered by
specific insurance policies.
in the case of land reclamation or the discovery of
archeological/war artifacts----
Even if the BP
were notrevised, an automatic extension would be triggered on
the deadline for completion of the works if total delays
ran more than 30 days behind schedule
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Penalties If the deadlines for the start up of the Functional Section and/or
the Entire Line were not met, the Concession Holder would becharged a set penalty of 30,000 euro per day of delay, up to amaximum of 6,750,000 euro
The Concession Holder would be subject to additional penalties if performance parameters were not respected
An initial performance assessment of the system would becarried out after the first 6 months of operations for the EntireLine
If one or more parameter did not meet the relative target value,a supplemental 6-month period would be granted to allow the
Concession Holder to implement any necessary correctivemeasures.
At the end of this time, the system would be monitored for 6more months, after which a definitive measure of performanceparameters would be established.
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Performance Parameters
system availability : a measure of the relationship between the amount of time the
system actually runs, and the nominal theoretical operations time.
availability = (minutes of actual service/minutes of scheduled service)*100,
r egular ity of ser vice-: a measure of the relationship between the number of runs
made and the number of runs planned:
regularity= (actual runs /scheduled runs)*100;
punctuality of ser vice
punctuality=[1-(late runs/total complete runs)]*100,
where late ----reaching the terminal more than 3 minutes past schedule.
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Penalties for underperformance
Refer To Table A2 and A3 on page 10
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Contract Termination
Non fulfillment of obligations by one of thecounterparties or cancellation for reasons of public
interest
Metro 5 would have the right to an indemnity to be
used to repay bank loans. This amount would equal the value of the works already
executed,
compensation would be made for loss of future income
totaling 10% of the value of the works yet to be
completed
If Concession Holder were in default, the Lenders could
name a new concession holder
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Construction Contract
The Construction Contract established joint liability of TBA
members and a 2-year warrantee period
The amount due for construction (452.64 millioneuro),payments would be made on the basis of performance
milestone certificates
2.5% would be withheld on each payment to serve asguarantee of the proper fulfilment of contractual obligations.
the Construction Contractor would be required to pay asupplemental penalty of 36,000 euro per day of delay not toexceed 14,850,000 euro
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If one or more parameter did not meet the relative target
value at the end of the Observation Period, the Contractor
would be required to pay penalties
As a guarantee of proper and timely fulfilment of the
obligations TBA provided the Concession Holder with a
performance bond equalling 8% of the amount due
the TBA could terminate the contract if the Concession
Holder failed to make a payment within 60 days of the
established due date.
In addition, the indemnity due was limited to the amount
paid by the Authority to the Concession Holder
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Operations & Maintenance Contract
The ATM was to be paid an annual lump-sum fee of 8.2
million euro for the operations period of the Functional
Section,
and subsequently 9.43 million euro
a lump-sum compensation of 4.08 million euro was set for
extraordinary maintenance
the Operator was subject to penalties if performance
parameters were not met after the Observation Period
ended not to exceed an annual total of 1.2 million euro
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Financial Structure
The cost of the project, totaling approximately 550
million euro, was funded through a mix of equity,
public grants, and bank loans
Refer to Table A4 page 14 for statement of sourcesand uses of funds for the construction phase
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Learning
Risk allotment among the different parties
Adherence to the contract
Lets Compare it to the ELDECO and DND flyover cases
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