Transcript Presentation - Private Partnerships and Rail 2005

European Federation of Railways Trackworks Contractors
Financing European Transport
Infrastructure
Vice President Wolfgang Roth
European Investment Bank
Amsterdam, 2 December 2005
EUROPEAN INVESTMENT BANK
OBJECTIVES AND PRIORITIES
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The EIB implements EU policies
EIB - European Union’s financing institution:

Created by the Treaty of Rome in 1958, to provide longterm finance for projects promoting European integration.

Subscribed capital EUR 163.7bn.

EIB shareholders: 25 Member States of the European
Union.

Lending in 2004: EUR 43.2bn (EUR 39.7 bn within the EU).

Total outstanding loans at 31.12.2004: EUR 265.8bn.
Development of Trans European and Access Networks is
one of five key strategic priorities set by the Board of
Governors of the EIB.
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EIB Strategic Outlook
Five core priorities
Economic and social cohesion in an enlarged EU.
Development of Trans-European and Access networks
(TENs).
Environmental Protection and Improvement, including
Climate Change and Renewable Energy.
Implementing of the Innovation 2010 Initiative (i2i).
Support of EU Development and Cooperation Policies in
Partner Countries.
EIB implements EU policies - a policy driven Bank.
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Loan Signatures in the European
Union
2000-2004: EUR 180.2 bn
8%
32%
31%
By sector
 Energy
 Communications
 Water
management
and sundry
 Industry, services,
6%
agriculture
11%
12%
Promoting EU policies of economic
and social cohesion.
 Education, health
 Global loans
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European Communications
Infrastructure
2000-2004 Individual loans: EUR 44.8bn
9%
13%
59%
19%
 Land-based
transport
 Air transport
 Telecom
 Sundry
Arteries of the single market
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The DEMAND for
TRANSPORT and RAIL
INVESTMENT
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EIB total loan
approvals to TEN-T
projects since 1993:
EUR 66 bn in EU15
Member States;
EUR 12 bn in Central
and Eastern Europe.
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EU Growth Initiative and EIB
 The EU Growth Initiative requires major investment in transport
networks across Europe.
 EIB is a policy-driven European institution. As such, EIB is
adapting its financial products to better serve the objectives
identified in the EU Growth Initiative.
 Improve the range of financial instruments available from the
Bank and increase the EIB resources available for the
development of TENs transport to 2010.
 Take additional risk where it adds value, but apply appropriate
risk pricing.
 Strengthen and, where possible, accelerate the investment in
TENs.
… in collaboration with the Commission, Member State
Authorities and the Private Sector.
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EIB wider role in the Growth
Initiative
 Financing of transport infrastructure is a core expertise of EIB.
Dedicated organisation has been established and is proven.
 EIB is a strategic advisor to the Commission, Member States
and Public Authorities on TENs and other institutional issues. It
collaborates effectively with national PPP taskforces.
 Proven risk management record with increasing use of
structured finance, securitisation, banking and capital markets.
 Commission and EIB have an established common interest in
realising the Community objectives. Combined use of bugetary
resources and EIB loans is envisaged under the Growth
Initiative.
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Trans European Transport
Network (TEN-T)
Investment challenges for the European Union until 2010:
 75 200 kilometres of roads.
 79 400 kilometres of railways.
 430 airports.
 270 international seaports.
 210 inland ports.
 traffic management systems, user information and navigation services.
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EU Growth Initiative
 Context : some figures…
– Total cost of TENs programme : EUR 600bn up to 2020.
– Priority Projects : EUR 220bn.
– TENs - T Quick Start Programme : EUR 38bn.
 Expected Private Sector Contribution : 10-100%.
 Private investment is to be a substantial additional resource
for implementing TENs on projects that deliver sufficient
profitability.
Critical role of PPPs, in particular in the Transport Sector.
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Trans-European Networks
- Transport
• EIB Lending Programme
– 2004-2006: EUR 25 bn for TEN-T.
– 2004-2010: EUR 50 bn for TEN-T.
• Special attention to “priority” projects …
… as subsections of 30 priority corridors/projects in the transport sector:
– 17 railway projects.
– 5 mixed rail/road or intermodal projects.
–
–
–
–
3 roads.
3 maritime/inland waterways.
1 airport.
1 Galileo Satellite Navigation System.
…EIB seeks to promote private sector participation
through equity and debt investors (risk takers).
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Investment Demand in Railways
 TEN-T until 2020 (source EC)
 EUR 190 bn from Priority TEN-T.
 EUR 380 bn from overall van Miert Group proposals.
 Urban and light rail over 20 years (source European Rail Research Council)
 EUR 140 bn of which EUR 30 bn in rolling stock.
 Top-down approach (source Back of the Envelope)
 EU-15 GDP : EUR 8545 m in 2000 to EUR 16900 m in 2030.
 EU-25 GDP : EUR 8940 m in 2000 to EUR 18020 m in 2030.
 “EU-30” GDP : EUR 9610 m in 2000 to EUR 19800 m in 2030.
 Transport sector investment 1 –1.5% of GDP depending on level of development.
 Share of railways in transport sector investments : 30%.
 Annual investment demand in European railway sector rises from EUR 30 bn
(2000) to EUR 60 bn (2030) in 2000 prices.
How much in PPP?
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RISKS INVOLVED IN INVESTING
IN RAIL
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Deliverability of Transport Projects
Main Challenges in a Lender’s View
 Planning and permitting process: Complex projects and many
parties.
 Design optimisation under technical, environmental, financial,
legal and regulatory constraints: Long time to decisions and
final design.
 Structuring of the procurement and financing including correct
costing: Complexity encourages keeping costs on public
budget.
 Funding: Complexity of most railway projects reduces scope for
risk sharing and PPP-type financing.
 Construction on time and on budget: Average construction
costs in railways 40% higher than forecast1.
 Ramp-up risk: Targeted by new EU Community Guarantee.
Source:
(1) Procedures for Dealing with Optimism Bias in Transport Planning (British Department of Transport, 2004);
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Demand for Asset and Risk
Assessment
• Average number of rail passengers 39% lower than forecast2.
• Responses to uncertainty:
– Careful analysis of base case assumptions for initial level and
growth of demand.
– Construction delays impact both costs but also revenues.
– Ramp-up period may be slower than anticipated.
– Replace static “number” estimate with probability distribution.
– Use simulation to better understand risk impact of multiple
variables.
– Guarantee release conditions.
– “Natural” hedges (e.g. weights to revenue & costs linked to
inflation).
• Uncertainty decreases during project cycle.
Rail projects inherently risky (before structuring).
Source
(2) Megaprojects and risk (Flyvbjerg, Bruzelius, and Rothengatter, 2003).
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PPP – a tool for bridging the gap
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Principles of Risk Allocation, Risk
Management and Mitigation (1/2)
•
Main Characteristics of PPPs
– Risk-sharing between public and private sectors.
– Long-term relationship between parties.
– Public service and ultimate regulatory responsibility remain
in public sector.
•
Using private sector skills for public sector services
– Contracts for services, not procurement of assets.
– Output, not input, specifications.
– Payments related to service delivery.
– Whole life approach to design, build and operation.
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Principles of Risk Allocation, Risk
Management and Mitigation (2/2)
• Criteria for PPPs
–
–
–
–
Economically viable for the Public Sector.
Financially viable for the Private Sector.
Appropriate Risk and Reward Balance for Public and Private Sector.
Public Sector: value for money.
• “Must” for successful PPPs
– Public Sector Political Commitment.
– Focused, dedicated and experienced public sector team – PPP Task
Force.
– Clear legal and institutional framework.
– Transparent and competitive procurement.
– Realistic risk sharing.
– Government Partnership.
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EIB’s approach to PPPs
1
EIB Financing Principles

Competitive tendering.

Non-exclusivity - support of all bidders through bidding
stage.

Investment Grade Risks on strategic public services.

EIB Complementarity with and leveraging of banks and
capital markets.

EIB benefits passed to end-users/taxpayer.

Utility Risk and Utility Reward.
EIB’s approach to PPPs
 Policy driven approach to PPPs based on the evaluation of
the benefits achievable.
 PPPs are an additional policy option. No bias in favour of any
particular procurement method.
 Expand expertise and financial resources available for
“infrastructure” investment.
 Facilitating greater private sector investment.
 Focus on strategic public services with clear Value Added.
Project selection and appraisal

Close collaboration with public sector to identify suitable
priority projects.

EIB aims to support competitive pressure during
procurement process.

Focus on the project:
• Risk assessment.
• Economic performance: socio-economic profitability
(risk of adverse selection of projects), value for money
for public sector.
EIB financing for PPPs
By volume : total EIB lending to PPPs of EUR 16 bn
EIB & PPP: Annual Financings closed
(in m EUR)
3500
3000
2500
2000
1500
1000
500
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
0
EIB financing for PPPs
By sector : transport dominates (85%)
6%
5%
2% 2%
7%
39%
17%
22%
Roads and Motorways
Tunnels and Bridges
Urban Development, Renovation and Transport
Airports
Traditional and High Speed Trains
Social Infrastructure (Education and Health)
Drinking and Water, Water Treatment
Power Generation, Transmission and Distribution
3. Lessons learned from EIB’s
PPP experience
1
Key lessons from the Bank’s
PPP experience






The importance of procurement.
The evidence of project performance.
Sectoral focus in PPP programmes.
Effective payment mechanisms.
Scale and expertise in PPP programmes.
Developments at European Union level.
Importance of procurement
 Competitive pressure in procurement a must for achieving
Value for Money from PPPs.
 Tendering process can be complex and, sometimes,
costly.
 Public and private sector need appropriate skills to design,
respond to and appraise procurement documentation.
 Full compliance with EU legislation key requirement for
EIB funding.
Evidence on PPP performance
 National audit authorities commit significant resources to
assessing PPP Value for Money.
 Reports are an important source of information, learning
and benchmarking.
 For example, UK National Audit Office:
– Cost and time performance in major infrastructure
generally good.
– Performance in IT sector generally weak.
PPP performance:
Evidence on construction projects from
the UK’s National Audit Office
Conventional
procurement
PPP procurement
Cost overruns for
the public sector
73%
22%
Delay in project
delivery
70%
24%
Sectoral focus
 Most countries commence PPP programmes in transport,
with later migration to other sectors.
 Rate of ‘migration’ to other sectors (health, education,
energy, water, waste treatment) reflects i) national
priorities and ii) legal frameworks.
 Tendency for project to cascade from central to local
government / municipalities.
Conclusions
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 Substantial investments required to achieve regional, social
and economic cohesion.
 Public finances and sector deregulation require increased
private sector funding also to meet transport infrastructure
investment needs.
 EIB is adapting its financial products to better serve the
implementation of TEN-T and co-operate more closely with the
private sector.
 Private sector is willing to take only well-defined and
manageable risks and demand risk-related remuneration.
 Careful project structuring allows for separately deliverable
components, which meet financiers needs and risk appetite.
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