Public Private Partnerships – Opportunities and Challenges 22 February 2005 Jonathan Drew HSBC Corporate, Investment Banking and Markets 1
Contents • A Typical PPP Structure • Key Investor Issues • Key Bankability Issues • Successful Implementation of a PPP Programme • PPP Implementation Process • Finance Instruments • Sources of Private Capital • Hong Kong Market – key developments • Hong Kong Case Studies 2
A Typical PPP Structure Government Construction Payment Services for service Debt Finance Special Purpose Vehicle Equity Operation 3
Key Investor Issues • Clear policy and commitment for the Investment programme – Government obligation undertaken by appropriate entities – Letting authorities adequately resourced and empowered for decision making – Clarity on budget and affordability constraints – Clarity on competing or complementary developments • Allocation of Risk and Reward – Risks must be clearly defined and appropriately allocated by contractual framework – Appropriate level of returns to private sector for risks undertaken • Project Structure – Contractual arrangements structured to facilitate debt financing and optimise overall cost of capital – Output specification clearly defined on long term basis 4
Key Bankability Issues • Clear contractual framework for allocation of risks • Adequate security on project assets • Proven track record of payment and performance by participants • Ability to step into project • Alternative suppliers • Adequate reorganisation or protection against changes in underlying project economics and specifications 5
Successful Implementation of a PPP Programme • Good project selection • Transparency of evaluation approach • Engage in prequalification and expression of interest to some broad stakeholder support and commitment to project • Well defined bid package with clear assessment criteria and output specifications • Establishment of enabling legislative and regulatory framework • Project teams with appropriate skills to structure and evaluate the bids and negotiate the contracts 6
PPP Implementation Process Procurement • Identify the requirement Involve industry • Initial feasibility and assessment of private Financing Process sector? value to Government - PSC • Initial prequel and expression of interest • Obtain financing proposals • Request for proposal • Due diligence • Review and evaluation of – Insurance submissions – Technical/Environmental • Negotiations and selection of – Financial preferred bidder – Commercial • Negotiation with preferred bidder – Legal Due Diligence • Documentation • Commercial close • Syndication of loan • Financial Close 7
Finance Instruments Senior Debt – 60 – 90% of Capital Value Project Cashflows Project Equity – 10 – 30% of Capital Value Project Funding • Typically long dated debt, amortising over the Senior Debt (Bank / Bond) period of the Infrastructure Asset / Concession Contract: Generally fixed rate debt • Typically injected either as share capital or Equity subordinated debt • Stable base yield can be enhanced by tax benefits, third party recourse or residual value of asset 8
Sources of Private Capital • Long term senior debt provided through domestic or international banking and capital markets • Developed capital markets can offer longer dated fixed price financing than bank markets – will require rating • Bank financing may offer more flexible financing structure than capital markets • Primary Equity providers remain the sponsors. Increasing interest to provide equity by financial institutions and investors attracted to stable long term yield 9
Hong Kong Market - key developments • Fewer international banks operating locally are seeking to book project assets • But the local Hong Kong and PRC banks remain very keen – subject to relationships and policy • The local HK$ capital markets have been greatly developed – including the retail investor base – monolines willing to wrap - however, the loan market will offer long maturities in HK$ • Hong Kong economic and currency issues remain in lenders and investors focus • Several Government initiatives to test the local and international appetite for Hong Kong project risk post 1997 • HK sponsors remain strong enough to invest in Hong Kong, but are opportunities better elsewhere? 10
Case Study - Infrastructure - AsiaWorld Expo Project Description • Design, build and operate a new 100,000m 2 exhibition centre at Hong Asia World Expo Kong International Airport over a 25 year concession period Hong Kong • Initial phase of 66,000m 2 to be followed by an expansion to take it up to (Dragages et Travaux Publics, 100,000m 2 NEC, Yu Miing Investments) • Tender invitations issued to 4 short listed bidders after more than 20 parties who have expressed interest • Project involves the formation of a JV between public and private sectors with Government contributing HK$2bn in equity and the land. Project International Exhibition Cen tre Size Awarding Authority • Construction costs of approx HK$4bn (HK$2.4 for Phase 1 and Hong Kong SAR Government HK$1.6bn for Phase 2) HSBC Role • Advisor to the successful bidding consortium led by Dragages et Travaux Publics HK Ltd (Bouygues) 11
Case Study - Infrastructure - AsiaWorld Expo Contractual Structure Asia World Expo Hong Kong (Dragages et Travaux Publics, NEC, Yu Miing Investments) Project International Exhibition Cen tre Awarding Authority Hong Kong SAR Government 12
Case Study - Infrastructure - AsiaWorld Expo Project Structure • JVCO to be formed between with Government and Airport Authority Asia World Expo Hong Kong (“Holdings” : 76.5%) and the private consortium (“JVP” : 13.5%) (Dragages et Travaux Publics, • Airport Authority contributed land deemed worth 10%, meaning effective NEC, Yu Miing Investments) project cost of HK$2.65bn • Holdings shareholding via ordinary shares and JVP via preference shares, allowing JVP priority access to dividends over Holdings • JVCO separated from OPCO to minimise risks to JVP shareholders from Project International Exhibition Cen tre operational and market risks • Government sought to create a structure such that it was in the interests Awarding Authority Hong Kong SAR Government of the private consortium to minimise construction costs, but also to ensure an operationally efficient design to ensure project value for money • Financing for Phase 1 via equity from Government (HK$2bn) & private consortium (HK$0.4bn) • Phase 2 expected to be debt financed with no Government contribution 13
Case Study - Transport - Western Harbour Crossing Project Description • Design, build and operate a dual three lane tunnel crossing linking Kowloon to Hong Kong Island • 100% private sector financing Western Harbour Tunnel Company Limited • Automatic toll adjustment mechanism • Challenging legislative process (CHT, China Merchants, CITIC, Kerry) Size • HK$5.2bn (of HK$7.5bn) Project HSBC Role Western Harbour Crossing • Advisor and Arranger to private sector consortium Awarding Authority Hong Kong SAR Government Financial close Dec 1993 Loan tenor 15 years Loan pricing 100 – 150 bp Leverage 70% Structural Complexity moderate Bank appetite >20 after syndication 14
Case Study - Transport - Western Harbour Crossing Contractual Structure WHC Ordinance WHC Ordinance Western Harbour Tunnel Company Limited Shareholders Shareholders (CHT, China Merchants, Deed of guarantee Deed of guarantee Deed of shareholder Deed of shareholder HK Government HK Government CITIC, Kerry) support support Project Agreement Project Agreement (30 year franchise) (30 year franchise) Project Project Company Company Project Western Harbour Crossing Awarding Authority Construction Construction Loan Agreement Loan Agreement Hong Kong SAR Government Contract (LSTK) Contract (LSTK) Independent Independent Traffic study Traffic study Lenders Lenders Contractors Contractors Independent Independent Traffic Traffic Consultant Consultant 15
Case Study - Transport - Western Harbour Crossing Project Structure • Innovative swap mechanism to reduce interest rate risk borne by the project company Western Harbour Tunnel Company Limited • Development of a completely new toll adjustment mechanism based on the cashflows available to the project company which achieved a low initial toll and (CHT, China Merchants, CITIC, Kerry) steady increases thereafter such that the project company was insulated to a great extent from volume risk. • The mechanism was included in the Ordinance and avoided the need for Government approvals. This allowed for a significantly long debt tenor of 15 years, Project Western Harbour Crossing competitive pricing and set the standard for future toll road financings in Hong Kong. • Investor has an agreed rate of return: Awarding Authority Hong Kong SAR Government •if cashflow is above return cap, then extra cashflow is channelled into a “toll stability fund” •if cashflow if below return floor, investor has the right to: •draw from the stability fund •adjust the toll level • Government does not take traffic volume risk 16
Thank You 17
Recommend
More recommend
