making public private partnerships a reality in serbia werner weihs-raabl infrastructure finance...
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Making Public Private Partnerships a reality in Serbia
Werner Weihs-RaablInfrastructure Finance & Public SectorErste Group Bank AG
PPP Finance Workshop
2PPP Finance Workshop 18 Nov 2010
IntroductionTransportation FinanceDeals 2009-2010
Roads
Social Infrastructure
Airports Harbours
Railway systems Energy networks
Education Healthcare
Utility systems
Bina Istra/ M6 III Hungary
R1 Slovakia/ D1 Phase 1 and 2 Slovakia
A3 Romania / Bar-Boljare Montenegro
Electronic Toll projects in Slovakia and France
Dubrovnik Airport
Brasov Airport
Prague Airport
Constanta Port
Port of Rijeka
High Speed Rail Tours-Bordeaux
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Infrastructure Why investing in Infrastructure?Employment Effects Of Infrastructure Investments Investments in Infrastructure have a „multiplicator effect“ they trigger short-term impulses for demand and
have a positive impact on employment
Effects on Employment of Investments in Transport Infrastructure
Effect of Investments of €72m (most of the toll road projects that are now in the market have a volume of EUR 1bn or more!)
Effect of Investments of €72m (most of the toll road projects that are now in the market have a volume of EUR 1bn or more!)
Direct Effect (Construction
sector)Indirect Effect (All sectors) Total
High-speed road network 426 353 779
National Roads 568 353 921
Public Transport 868 375 1,243
Rail Infrastructure
Extension of Network 851 382 1,233
Train Stations 922 390 1,312
the work force needed for large road PPP transactions is sometimes immense – depending on the size and complexity, e.g. tunnels.
D1 Phase 1: up to 7,500 people in peak times!
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PPP ModelsNecessary Considerations
Each PPP Project is a mortgage to be paid off over a long time period – concession periods of 30y+ Each PPP must be added to all other annual commitments effect the annual budgets! Even good Value for Money must be affordable – sometimes projects are too large, e.g. Bar-Boljare Montenegro
Projects must be financially attractive to the private sector – e.g. IRR’s above 10% They must have a regular revenue stream that will make them viable – annual availability payments in M6 III, R1
or sufficient toll revenues
Do not expect gold plated if only paying for plastic Accept risks have to be shared – e.g. land acquisition especially in CEE, problem in Czech Republic and Romania
especially Accept the private sector has to make a profit
Affordability:
Bankability:
Managing Expectations of the Public Sector:
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PPP ModelsFinancing Issues
„Bankability“ of PPP‘s and other Infrastructure Projects
Strong Political will /stable regulatoryand legal framework
Secure and Stable
Cash-Flows
Demand forProject
EnvironmentalAspects
Technical Complexity
Early-TerminationRegulations
Liability of Sponsors
Debt ServiceReserve
Government Support
Optimal Risk Allocation
Bankability Issues
strong revenuesupport e.g. through
availabilitypayment mechanisms
e.g. Step-in Rights, compensation payments
Minimum DSCR requirements
Solid Private Partner and adequateEquity contribution
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Relevance of Infrastructure for Banks Infrastructure in Today‘s Market
Crisis of confidence is ongoing and fundamentals are deteriorating Bank Capital and Liquidity are still scarce and banks will seek to improve balance sheet portfolio credit. In PPP’s
the new developments are: Big Club Deals Still long tenors but with a different structure (mini-perm structures are mainly used) Higher margins achievable Better security packages provided by the sponsors Higher equity ratios Guarantees by state (e.g. on EIB tranches like in D1) Moderate deal size – Ticket sizes taken by banks went down significantly but are already increasing again
(take amount in R1 between EUR 50-100 million) Relationship or existing bank groups (the banks currently active in the PPP road projects like R1 and D1
are mainly participating by either following core market strategies– like Erste Group – or core client strategies – like the French banks following the French construction companies like Vinci and Bouygues)
The world has changed & is likely to recover slowly:
Infrastructure Deals are less volatile and provide a level of “safe haven”
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Financing of PPP’s in Current TimesKey Project Agreement Developments (I)
Key Elements of the risk transfers from public to private sector are being revisited following „credit crunch“:
Item Pre 2003 2003-2007 Current
Termination provisions Element of guaranteed compensation for debt funders on larger projects
Subject to NPV of a % of cash flows less rectification costs – could lead to debt funders losing all debt
Guarantees on debt repayment either through direct guarantees or termination provisions guaranteeing amounts
Longstop dates to construction completion
Generally 12 months Had gone as low as 1 month
12 months? – more important to ensure funders’ TA’s accept as reasonable
Financing terms movement from Preferred Bidder to FC
Generally accepted that private sector bares risk, although public sector did accept where reasonable
Private sector Public sector
Refinancing benefits Sometimes shared, although earlier schemes 100% private
Shared 50:50 Ratchet mechanism towards 70%+ public sector
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Financing of PPP’s in Current TimesKey Project Agreement Developments (II)
Key financing terms are being revisited following „credit crunch“:
Item Pre 2003 2003-2007 Current
Margins 100bps+ (150bps on larger projects)
As low as 40bps 250-500bps
Market flex Occasionally margin flex No Many clauses aimed at minimising pricing risk
Base Case Cover ratios 1.25x As low as 1.10x 1.25x +
Tenor of debt 25-29.5 years for bank Bank debt exceeded 30 years
Max 22-28 years (though marketed as short-term)
Many banks restricted to 7 years
Cash sweep Element of sweep post year 8
None Typically 100% cash sweep post year 8
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PPP ModelsKey Lessons Learned in Planning PPP
Low capital value projects – disproportionate procurement costs (e.g. projects below EUR 20 million) Projects prone to unpredictable changes – e.g. IT
Reduces procurement time and costs – less document preparation Reduces negotiation time – position clear to both sides
Good quality projects should not be delayed unnecessarily Long term contract – locked in and difficult to change
Suitably resourced project team Experienced advisors
PPP is NOT appropriate in all cases
Standardized Guidance (UK, NL)
Robust legislation, project development, and approval
Developing Public Sector Expertise
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Infrastructure Finance in Line With Maastricht Maastricht Rules on PPP
A PPP‘s assets should be classified off-balance sheet for government if both of the following conditions are met:
The private partner bears the construction risk
The private partner bears at least one of either price or demand risk
Combinations are also possible: Traffic risk partly taken by the private sector (A3 Romania) or “Shadow Toll” models (A5 Austria)
Availability based PPP‘s like M6 III, R1, D1 Phases 1+2
PPP‘s bearing full traffic risk for the private sector like High Speed Rail Tours Bordeaux, some German A Models
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Construction
Design
Availability of service
Quality of service
Maintenance & renewal
Market
Obsolescence
Force majeure
Residual value
Regulation policy
Private Sector
Public or Private
Shared
Public Sector
Construction
Design
Availability of service
Quality of service
Maintenance & renewal
Market
Obsolescence
Force majeure
Residual value
Regulation policy
Traditional PPP
PPP financing is gaining ground in infrastructure finance
Private sector partner bears construction risk AND demand risk OR availability risk
If risk transfer is adequate, solution is Maastricht neutral
Risk exposure in the PPP model
Infrastructure Finance in Line With Maastricht Maastricht Neutral PPP StructuresRisk Exposure in the PPP Model
Source: Partnerships UK
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EU funds – Key for long-term developmentInvestment areas
Transport Infrastructure in CEEOutlook & Potential
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Serbia Corridor X
250km in Serbia; Total investment volume EUR 1.7bn, planned completion date 2012
Belgrade – South Jadran road to Montenegro
Belgrade Bypass 69km from Zemun to Pancevo; first section opened in 2009; second section partly
finished; third section (bridge across the Danube) under construction Total investment volume EUR 543mn (EBRD 55mn, EIB 180mn)
Novi Sad Bypass
Road Transactions in CEE Potential & Outlook
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Refurbishment of Gazela bridge (Belgrade) Contract signed Total investment cost EUR 58mn (EIB 33mn)
Beška bridge on highway Belgrade-Novi Sad Building started in 2006 (funds EIB/EBRD EUR 53 mio)
Zemun-Borca bridge Project volume: EUR 170 million Construction period: 2 to 3 years
Zezelj bridge construction EUR 60 million
15Erste Group
Serbia
Road Transactions in CEE Potential & Outlook
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Belgrade Metro Project costs: EUR 720 million Construction period: until 2020 3 lines - line one should be completed by 2014, line 2 and 3 between 2018 and 2020
Belgrade - Bar railway Necessary investments estimated at: EUR 200 - 300 million Project duration: 10 years Reconstruction should enable an average speed to increase from the current 40 to 100 km/h
Modernisation of Serbian railways and construction of container terminals on Corridor 10, improvement of
information technologies and digitalisation of the telecommunication network with optical infrastructure is
necessary.
16Erste Group
Serbia
Road Transactions in CEE Potential & Outlook
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Montenegro
Bar-Boljare Highway Part of European Corridor Bar – Belgrade – Budapest Total estimated construction cost for 170km: EUR 4bn After termination of CA with Konstruktor-led consortium,
negotiations with Greek-Israeli Actor-Shikunbinui consortium (second ranked)
Support by multinationals not secured
Road Transactions in CEE Potential & Outlook
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Port / Waterways Transactions in CEEPotential & Outlook
Port of Constanta Modernisation Programme Possible extension of Pier III Completion of the North breakwater – extension by
1,050m (EUR 122mn) Improvement of railway capacity (EUR 17.6mn) Road bridge across Danube-Black Sea Canal (EUR
28.8mn) and over link canal (EUR 31mn) Other planned development and modernisation projects
will amount to an estimated investment volume of approx. EUR 500mn
Romania
Extension and refurbishment of several ports along the Danube in coordination with the planned EU strategy for the Danube region (presentation planned before the end of 2010)
Danube Strategy of European Union
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Croatia
Port of Rijeka Rijeka Gateway Project I Rijeka Gateway Project II
Port of Dubrovnik
New cruise terminal, EUR 140mn Other Port Modernisation Projects
Port of Ploce (new bulk cargo and container terminal, EUR 206mn Port of Zadar (new ferry port, EUR 236mn) New container terminal at the island of Krk, EUR 450mn
Montenegro
Port of Bar Privatisation and Modernisation Tender for the sale of 54.05% of the shares in the „Container terminal and general cargo“ and a 30-
years concession, with an obligation to invest
Modernisation of the container and passenger terminal, expansion of the liquid terminal capacities, construction of new quays and procurement of new equipment
Port / Waterways Transactions in CEEPotential & Outlook
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Czech Republic:RES¹ Target 2020: 13% (6.1% 2005) Wind: 192 MW installed ²Feed in tariff ca. 91 EUR/ MWh; 20 yearsGreen Bonus ca. 75 EUR/ MWh; 20 yearsPV: 693 MW installedFeed in tariff: ca. 500 EUR / MWh; 20 yearsGreen Bonus: 460 EUR / MWh; 20 years
Croatia:RES¹ Target 2020: 5%Wind: 28 MW installed ² Target 2030: 400 MW Feed in tariff 98,7 EUR/ MWh; 12 yearsPV: 0.1MW installedFeed in tariff 290 EUR/ MWh; 12 years(for large insallations >30kwp)
Poland:RES¹ Target 2020: 15% (7.2% 2005) Wind: 725 MW installed ² / Target 2010: 2000 MWRegulation Wind:Quotas: 7% – 2008; 8.7% – 2009; 10.4% – 2010-2014Price = Green Certificates 66 EUR + power offtake 39 EUR= total 105 EUR/ MWh; 15 years (further steps to be set after 2017 as framework agr. ends) PV: 1 MW installedFeed in tariff: ca 120 EUR/ MWh
Slovak Republic:RES¹ Target 2020: 14% (6.7% 2005) Wind: 3 MW installed ² / Target 2015: 750 MWFeed in tariff ca. 81EUR / MWh; 15 years PV: 0.1 MW installed / Target 2015: 10 MWFeed in tariff ca. 425 EUR / MWh; 15 years(for large insallations >100kwp)
Hungary:RES¹ Target 2020: 13% (4.3% 2005)Wind: 201 MW installed ² Target 2020: 800 MWFeed in tariff ca. 105 EUR / MWh; 10 yearsPV: 0.7 MW installedFeed in tariff ca. 105 EUR / MWh; 10 years
Romania:RES¹ Target 2020: 38% (33% 2010)Wind: 14 MW installed ² / Target 2020: 200 MWPV: 0.6 MW installedRegulation PV + Wind:Quotas: 5.26% – 2008; 6.28% – 2009; 8.3% – 2010: 16,8% - 2020Green Certificates: 27 - 55 EUR / 1 MW; 15 years (2 GC wind and 6 GC photovoltaic)
Bulgaria:RES¹ Target 2020: 16% (9.4% in 2005)Wind: 177 MW installed ²Feed in tariff 74-97 EUR/ MWh; 15 yearsPV: 6 MW installedFeed in tariff ca. 373 EUR/ MWh; 15 years
Austria:RES¹ Target 2020: 34%Wind: 995 MW installed ²Feed in tariff 97 EUR/ MWh; 12 yearsPV: 37,5 MW installedFeed in tariff: 250 EUR/ MWh (large installations > 25kwp); 12 years
Current Regulation Wind & PVRegulations and current capacities in CEE
¹ RES: Energy from Renewable Sources
Figures may vary significantly due to changes in FX rates.
Serbia:RES¹ Target 2020: n.a. Wind: n.a MW installed ²Feed in tariff 95 EUR/ MWh; 12 yearsPV: n.a. MW installedFeed in tariff 230 EUR/ MWh; 12 years
² Installed figures as per 31.12.2009
Summary & OutlookLessons learned · Strategy · Potential for cooperation
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Deal size the smaller the project, the easier and faster it can be implemented
Complexity
low complexity leads to less construction risk and therefore to lower risk premiums
PPP is not always the solution!
for local and regional projects – flexibility is required (i.e. direct financing, promissory notes)
Strong political support - PPP project priority list
Long term strategy for PPP projects and infrastructure development
Availability and efficient use of alternative funds (e.g. EU, EBRD, etc.)
Political risk imminent
Summary & Outlook Lessons learned in 2009 and 2010
CEE is a promising market for infrastructure PPPs but the commitment of the governments must be increased and the available knowledge for successful
realisation used.
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Use our strong local presence in the market and the industry knowledge of Group Infrastructure & Public Sector to assist the Public Sector in defining master plans for the infrastructure development of their respective countries
Potential Support:
Infrastructure and PPP Advisory Services and/or working groups, identifying quick wins etc.
Proposal for financing solutions for the various projects – also in case PPP’s are not the optimal solution
Evaluation of EU funding potential and assistance in absorbing EU funds
Offer trainings for Public Sector representatives, especially on regional and municipal level – e.g. project management skills, tender preparation, transport route planning
Banks and industry players present in the CEE/SEE market have to play an active role in the development of infrastructure and the realisation of projects due to the
lack of experience and track record of the Public Sector in these countries.
Summary & Outlook Our strategy for the coming years
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More than 17 million clientsErste Group
Clients: 5.3mnMarket share based on:Retail deposits: 29.4%Retail loans: 27.4%Branches: 660
Clients: 3.1mnMarket share based on:Retail deposits: 19.1%Retail loans: 19.0%Branches: 1,053
Clients: 0.8mnMarket share based on:Retail deposits: 12.5%Retail loans: 13.1%Branches: 138
Clients: 0.2mnMarket share based on:Retail deposits: 2.7%Retail loans: 3.2%Branches: 73
Clients: 2.5mnMarket share based on:Retail deposits: 27.7%Retail loans: 26.1%Branches: 281
Clients: 0.9mnMarket share based on:Retail deposits: 8.2%Retail loans: 13.4%Branches: 201
Clients: 4.5mn Market share based on:Retail deposits: 23.4%Retail loans: 19.9%Branches: 665
Clients: 0.1mnMarket share based on:Retail deposits: 0.3%Retail loans: 1.7%Branches: 134
All data as of March 2010.
Present through Kärntner Sparkasse
Present through SteiermärkischeSparkasse
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Thank you!
Werner Weihs-Raabl Erste GroupHead of Group Infrastructure Finance & Group Public Sector 1020 Vienna, Obere Donaustraße 17 - 19
Tel.: +43 (0) 50100 - 18010Fax: +43 (0) 50100 - 9 18010mobile: +43 (0) 664 818 05 [email protected]
Milica SredanovićErste GroupStrategic Relationships1020 Vienna, Obere Donaustraße 17 - 19
Tel.: +43 (0) 50100 - 19903mobile: +43 (0) 664 818 38 25