milan metro line 5

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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



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



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)



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



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



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



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



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



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).



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.



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.



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



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.



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



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.



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.



Penalties for underperformance

Refer To Table A2 and A3 on page 10



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



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



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



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



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



Learning

Risk allotment among the different parties

Adherence to the contract

Lets Compare it to the ELDECO and DND flyover cases

milan metro line 5

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