MIT1_040s09_lec07

MIT1_040s09_lec07 - MIT OpenCourseWare http/ocw.mit.edu 1.040 Project Management Spring 2009 For information about citing these materials or our

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Unformatted text preview: MIT OpenCourseWare http://ocw.mit.edu 1.040 Project Management Spring 2009 For information about citing these materials or our Terms of Use, visit: http://ocw.mit.edu/terms. 1.040/1.401 1.040/1.401 Project Management Spring 2009 Private Finance Initiative Lecture 7 Fred Moavenzadeh Department of Civil and Environmental Engineering Environmental neering Massachusetts Institute of Technology Edited by Kyle Frazier Edited Private Finance Initiative Private „ „ „ Denationalization program of Margaret Thatcher (British Prime Minister in the 1980’s) Minister The concept of PFI was introduced in 1992. Unlike privatization the emphasis of PFI is not on “asset acquisition” but on “procurement of service” acquisition The Concept: „ “The Private Sector will provide funding for the capital project and will operate the facility to provide a public service” and „ “Revenue will be achieved either directly from the user or through a payment mechanism negotiated with the public through sector” sector Government’s Role: „ “Provision of public services,” not acquisition of capital assets. „ Arguments for popularity of PFI „ „ „ „ „ Primarily: Government budgets have been capped; thus less funding is available for acquisition of capital assets available Government’s ability to borrow has been curtailed (see above) Direct user fees provide a clear conduit for capital recovery, avoiding governmental bureaucracy. governmental Efficiency arguments: Design-Build-Operate nature of PFI projects allows for greater efficiency allows Private sector can/could manage and operate projects in a more efficient manner? manner? „ Implementation: „ „ „ Financially free-standing projects Joint venture projects Sale of services „ Issues of importance to success of PFI’s „ „ „ „ Educating government agencies (specifically local authorities) about “do’s” and “don’ts” of PFI service delivery Risks Legal limits Cost of capital (commercial roles vs. tax-free bonds) In the case of joint venture type of PFI, government authority is faced with: with: „ „ „ „ Bidding for PFI projects „ Whether the project will proceed at all; if so Whether the project will be procured traditionally or as a PFI one; if so How to choose aPFI ssupplier. PFI „ The last point is typically the main cause of contention between the governmental authority and PFI bidders. „ „ „ Large sums of money involved in bid preparation preparation Long negotiating time Lack of experience on both sides Construction Industry’s Role: Construction „ „ Since they know how to build and - on many occasions - how to maintain infrastructure projects, they werethe main players these types of PFI projects. infrastructure the main players these types of Their weaknesses: „ Lack of capital to participate in capitalization „ Lack of experience in operation & cost flow management „ Lack of experience in long-term nature of the projects „ Lack of experience with management of PFI’s risks „ The design officers are inexperienced in translating demand for services se into design into Public Sector’s Role „ „ „ Protection of public funds Value for Money (VFM) criterion Ambiguity over risk assumption & risk allocation „ „ Lack of Experience & Expertise in Writing an “Output Specification” or “Service Provision Document” as against an “Asset Provision Document” Provision Lack of Experience with past projects; thus a need for comparison on the basis of “VFM” especially when public funding is being committed. How the public sector comparator (PSC) is used: Project involved public money? Yes NO No comparator required No VFM test Is public sector main source of revenue? Yes NO No comparator required Test for VFM against alternative use of funds Might have gone ahead if publicly funded Yes NO No comparator required Test for VFM through competition and external benchmarks Test for VFM through competition and external benchmarks vs. comparator NO Is a PSC available? Use a PSC No comparator required Yes Public – Private Responsibilities Public When the project cannot be financed by the private sector, then the public sector enters in a variety of forms in order to close the the gap between commercial financial analysis and social cost-benefit gap analysis. analysis. „ Means for making projects feasible: Means „ „ „ „ Public Sector assumes additional risk sharing, thus increasing the robustness of the project cash flow and, in turn, attracting robustness lenders with a better rate of interest. lenders If the problem cannot be resolved by risk sharing, then the public sector could take an additional equity stake in the project. public The public sector could generate additional revenue. (Case of Athens Airport. Government imposed additional tax on airline Athens tickets.) tickets.) Indirect Means Such as: „ „ „ Tax Holidays Grace Period Soft Loan(s) Infrastructure Project Global Lead Arrangers – Infrastructure Bank Loans (US $ Millions) 2005 and 2006 2006 2006 Rank 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Name Royal Bank of Scotland Calyon Societe Generale JBIC BNP Paribas HSBC BBVA Grupo West LB Goldman Sachs Other Total 2005 Rank 4 3 1 7 2 14 22 6 20 Number of Amount Percent of Facilities Underwritten Total 76 69 45 7 54 39 35 42 30 14 1,006 1,417 $12,029 8,745 7,037 5,935 5,854 5,307 5,213 4,094 4,053 3,994 98,705 $160,966 7.1% 5.1 4.1 3.7 3.4 3.1 3.1 2.5 2.5 2.5 62.9 100.0% European Investment Bank 37 Infrastructure Project Global Lead Managers – Infrastructure Bonds (US $ Millions) 2005 and 2006 2006 2006 Rank 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Name Credit Suisse ABN Amro HSBC Citigroup Deutsche Bank Lehman Brothers Royal Bank of Scotland Morgan Stanley Goldman Sachs Barclays Other Total *no deals arranged in 2005 2005 Rank 8 12 a 1 6 3 20 a 2 9 Number of Amount Percent of Facilities Underwritten Total 7 2 3 2 4 4 5 3 6 4 26 66 $3,340 1,564 1,537 1,435 1,393 1,350 1,188 1,066 997 972 4,862 $19,704 16.9% 7.9 7.9 7.3 7.1 6.8 6.0 5.4 5.0 4.9 24.9 100.0% Infrastructure Project Global Lead Arrangers, PPPs Infrastructure – Bank Loans (US$ Millions): 2005 & 2006 2006 2006 Rank 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Name Dexia Group Royal Bank of Scotland Epfa Bank BBVA Grupo Grupo Santander Caja Madrid Bank of Scotland Calyon BNP Paribas Other Total Market a: tied for 28th 2005 Rank 1 8 32 28a 28a 5 3 14 43 Number of Amount Percent of Facilities Underwritten Total 12 20 26 10 8 6 7 10 4 4 110 217 $3,076 2,689 2,590 1,723 1,187 1,143 1,009 772 761 758 9,772 $25,480 12.0% 10.4 10.0 6.7 4.6 4.5 3.9 3.0 3.0 3.0 38.9 100.0% European Investment Bank 6 Infrastructure Project Global Lead Managers, Infrastructure PPPs – Bonds (US$ Millions): 2005 and 2006 PPPs 2006 2006 Rank 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Name ABN Amro HSBC Deutsche Bank Citigroup Morgan Stanley Barclays Royal Bank of Scotland Merrill Lynch RBC Capital Markets Bank of Scotland Other Total Market 2005 Rank 4 a 2 7 a a a a 3 a Number of Facilities 2 3 4 1 3 2 1 2 3 1 5 22 Amount Underwritten $1,564 1,537 1,393 1,281 1,066 733 644 630 513 305 681 $10,347 Percent of Total 15.1% 14.8 13.4 12.4 10.3 7.1 6.2 6.1 5.0 2.9 6.7 100.0% Source: Adapted from Infrastructure Journal 2006 League Tables at http//www.ijonline.com and casewriter calculations. Note: Tables include infrastructure projects in which a significant part of the assets are project financed. Sectors reported include oil and gas, power, telecom, water and sewage, petrochemicals, mining, and other, excluding agriculture, aviation, real estate, manufacturing plants and shipping projects. a: No PPP deals arranged in 2005 Distribution of 620 Construction Contracts by Distribution Numbers of Years Numbers Number of Years < 1.0 Number Percent 152 255 1.1 to 2.0 244 39% 2.1 to 3.0 144 23% 3.1 to 4.0 47 8% 4.1 to 5.0 13 2% >5. 0 20 3% Mean 2.1 Median 2.0 Note: The construction period is the number of years to construct the project. Distribution of Debt Instrument Maturities by Distribution Number of Years: 2000-2006 Number Number of Years <5 Bank Loans 26% Bonds 10% 5 to 9.9 38% 29% 10 to 14.9 19% 33% 15 to 19.9 10% 26% 20 to 25 4% 11% > 4% 2% Mean 9.9 11.6 Median 8.0 10.2 Sources: Thompson Financial SDC New Securities Issuance Database (bonds) and Loan Pricing Corporation (loans). Number of project loans = 1,443; Number of project bonds = 126 Contract Length: 1994 to 2006 Distribution of Initial Debt-to-Total Capitalization Distribution Ratios by Year: 2002 to 2006 (633 projects) Ratios Debt-to-Total Capital 2002 <50% 50%-59% 60%-69% 70%-79% 80%-89% 90% Total Mean Median 15% 11 9 11 26 26 100% 71% 80% 2003 28% 9 9 17 26 12 100% 58% 71% 2004 13% 10 10 22 23 22 100% 71% 76% 2005 13% 7 9 13 28 26 100% 74% 76% 2006 8% 8 14 22 21 28 100% 75% 78% Total 12% 9 12 22 24 21 100% 71% 76% Project Finance Lending by Region: 2002 - 2006 Project Amount of Project Lending by Region (US$ Billions) Region Western Europe Asia Middle East North America Americas Australia /New Zealand Africa Eastern Europe Total 2002 $23.36 10.61 2.75 10.32 6.22 6.06 38% 17 4 17 10 10 2003 $29.40 12.44 6.50 5.55 7.24 3.81 42% 18 9 8 10 5 2004 $25.69 24.85 18.56 16.37 12.59 10.73 22% 21 16 14 11 9 $55.13 16.04 28.15 14.39 6.59 8.92 2005 39% 11 20 10 5 6 2006 $57.84 28.42 31.20 34.96 9.05 10.79 33% 16 15 20 5 6 Total 02-06 $191.42 92.36 87.15 81.60 41.69 40.31 34% 16 15 14 7 7 4 Year CAGR 25% 28 84 36 10 16 1.32 1.54 62.18 2 2 100% 1.90 2.72 $69.56 3 4 100% 4.96 2.69 $116.44 4 2 100% 6.36 4.66 $140.30 5 3 100% 6.09 2.26 $180.61 3 1 100% 21.74 12.83 $569.09 4 2 100% 40 14 31% Project Finance Lending by Sector, 2002 - 2006 Project Amount of Project Lending by Sector (US$ Billions) Region Power Transpor tation Oil & Gas Petroche micals Leisure & Property Telecom Industrial Mining Water & Sewage Other Total 2002 $20.20 13.59 6.44 5.71 4.76 32 22 10 9 8 2003 $24.07 14.99 9.03 5.88 4.44 35 22 13 8 6 2004 $35.26 23.51 22.52 8.80 7.00 30 20 19 8 6 $44.42 28.73 24.04 6.97 13.28 2005 32 20 17 5 9 2006 $57.11 44.60 26.37 20.26 17.25 32 25 15 11 9 Total 02-06 $181.06 125.42 88.40 47.62 46.76 32 22 16 8 8 4 Year CAGR 30 35 42 37 37 7.29 0.82 1.00 0.16 2.21 $62.18 12 1 2 0 4 100% 4.99 3.18 1.11 1.04 .84 $69.56 7 5 2 1 1 100% 7.34 5.23 3.57 2.17 1.04 $116.44 6 5 3 2 1 100% 10.19 4.13 2.46 3.73 2.36 $140.30 7 3 2 3 2 100% 3.14 4.23 3.31 3.82 0.53 $180.61 2 2 2 2 0 100% 32.59 17.56 11.45 10.92 6.98 $569.09 6 3 2 2 1 100% -19 51 35 121 -30 31% Project-Finance Bank Loans by Sector and Region Project (US$ Billions), 2002 to 2006 (US$ Sector Europe, Middle East, Africa Asia Pacific Americas 2002 to 2006 Total Percent of Total Power Transportation Oil & Gas Petrochemicals Leisure & Property Telecom Industrial Mining Water & Sewage Other Total Percent $83.35 72.99 43.68 27.72 37.29 23.50 8.78 2.15 8.78 4.34 $312.58 54.9% 38.55 37.75 16.69 15.55 7.83 6.51 4.45 3.10 1.28 1.53 $133.32 23.4% 59.15 14.69 15.49 4.34 1.62 2.93 4.27 6.19 0.85 1.12 $123.19 21.6% 181.06 125.42 88.40 47.62 46.76 32.95 17.56 11.45 10.92 6.98 $569.09 100% 31.8 22.1 15.5 8.4 8.2 5.8 3.1 2.0 1.9 1.2 100% Source: Adapted from Project Finance International, various issues January 2002 to January 2007 Shaded boxes show market segments with the largest amount of bank financing – 5% or more of total amount loaned. Other includes waste and recycling, agriculture, and social infrastructure (e.g., schools, hospitals, prisons) projects. ...
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