m6 motorway ppp project, hungary: a case study david asteraki, ing bank nv

1 M6 Motorway PPP Project, Hungary: A Case StudyIFSL PPP Seminar, Athens, 26th May 2005

M6 Motorway PPP Project, Hungary: A Case Study

David Asteraki, ING Bank NV

IFSL PPP Seminar, Athens26th May 2005


PPP Road ProjectsA great international success

Widely used across Europe, North America, Asia, Australia, South Africa, etc.

Numerous studies have demonstrated value for money

There is keen interest from: Construction contractors

Operators

Financial investors

Debt financiers (banks, bond investors, bond insurers)

Procurement can be quick and efficient


M6 Motorway Procurement TimetableAn international record

M6 Motorway, Hungary

Based on availability payments

1st stage tender (pre-qualification) launched 31 January 2004

2nd stage tenders (3) submitted19 July 2004

Project Contract signed 2 October 2004

Financial Close 15 December 2004

10½ months in total

ING advised Hungarian Government

M8 Fermoy Bypass, Ireland

Based on mix of real tolls and construction & operating grants

Pre-qualification launched June 2002

Initial tenders (4) submitted November 2002

BaFOs (2) submitted December 2003

Project Contract signed and Financial Close June 2004

2 years in total

ING arranged and provided debt finance


M6 Motorway Project, Hungary

Awarded by National Motorway Company on behalf of Ministry of Economy and Transport

Awarded to consortium of Bilfinger Berger, Porr & Swietelsky

Final design, construction, financing, operation and maintenance of motorway over 22 years

58 km of dual two-lane motorway, 10 junctions, 54 bridges between Érdi tető (SW of Budapest) and M8 at Dunaújváros

Includes some works to local roads

Total Project value approximately €480 million

€411 million of debt finance with tenor of 20.5 years


Hungary: Planned Motorway Network to 2015M6 forms key part


M6 Motorway Project: A Great Success

Procured in record time

Construction timetable meets Government objectives

Good risk transfer to private sector

4 strong international consortia submitted 1st stage bids

3 strong 2nd stage bids received

Government’s risk allocation broadly maintained

Good Value for Money Construction, O&M and finance costs all competitive


Why was the M6 Project such a success?

Strong political support and commitment

Supportive public sector decision making process

Sensible approach to market

Standard risk allocation

Standard Project Contract and Financiers’ Direct Agreement

Availability-based payment mechanism No net traffic risk

High quality public sector advisors


Strong Political Support and Commitment

Government as a whole committed to PPP projects

Strong personal support from Minister of Economy and Transport Istvan Csillag and his deputy Imre Rethy

Absence of real tolls paid by motorists reduced political risk

Renegotiation of M5 Motorway Project gave good precedent Political imperative to remove real tolls required PPP structure

Initial support and commitment made decision making and approval much easier


Effective public sector decision making process

Negotiating team had: Clear, realistic mandate with delegated decision authority

Ready access to ultimate decision makers (Ministers Csillag & Rethy)

Strong leader (Fruzsina Biro) with commercial experience

Commitment and willingness to work hard!

There were no rival decision makers All parties bought into negotiating team’s mandate


Sensible approach to market

Announcement in international press

Well developed initial information package Project description

Initial design

Indicative risk matrix

Payment mechanism

Transparent criteria for selecting tenderers

Well developed Invitation to Tender/Negotiate Full draft Project Contract including schedules

Transparent criteria for selecting winning tender


Standard risk allocationBased on market standards that have built up over time

No significant deviations that favoured the public sector: Minimised delays and legal costs during negotiations

Maximised value for money due to familiarity with risk

No unmanageable risks Public sector bears risk of approvals, land acquisition, etc.

Eurostat rules now favourable to standard PPP projects: Private sector need bear only minimum of construction risk and either

demand risk or availability risk for Project to be off balance sheet

Key issue is compensation on termination for default Compensation 65% of value of Project to the Government

No automatic full repayment of debt


Project Contract and Financiers’ Direct Agreement

Based on existing precedents (UK OGC Guidance) Familiarity among tenderers and advisors shortened negotiations

Risk allocation is more obvious

Limited need for new drafting, minimising legal costs

UK OGC Guidance is widely accepted

English language used, even though under Hungarian law Made project more attractive to international tenderers

Eliminated translation costs and time


Availability-based payment mechanismPrivate sector bearing traffic risk reduces value for money

Private sector has very limited ability to manage or mitigate However, investors and financiers have been willing to bear it

Private sector bearing ANY net traffic risk lengthens procurement period and adds to tender costs Tenderers and their financiers both require detailed analysis

Financiers particularly are conservative and require higher margins and cover ratios

“Green field” project reduce predictability of traffic volumes

Overall, likely to lead to more expensive project


How do availability payments work?

Predefined level of gross payments (focus of tender) Payment deductions for unavailability depending on:

Length of road affected

Number of lanes affected

The use of contraflow (on grounds of reduced safety)

Duration of unavailability

Time of day (higher in peak hours), day of week, season

Lanes “unavailable” if not usable or unsafe Periods of maintenance included, to incentivise minimum disruption

Exclusions for external events (snow, accidents)

Additional deductions for poor performance of services


Strengths and weaknesses of availability payments

No politically difficult real tolls

No private sector traffic risk premium Minimises Project cost

Procurement period minimised No need to undertake traffic studies

BUT

Not favoured by EU (prefer “user pays”)

High impact on public sector budget


Public sector advisorsFinancial, legal, technical

Extensive international experience True for team members as well as company

Depth of resources

Fee rates may be high for quality advisors, BUT their experience leads to: More efficient procurement with likely lower overall cost

Better value for money project

Using cheap but inexperienced advisors is false economy

m6 motorway ppp project, hungary: a case study david asteraki, ing bank nv

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