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INFRASTRUCTURE & PROJECTS GROUP

INFRASTRUCTURE & PROJECTS GROUP. Guarantees and Government Financing for PPPs PPP Days 2010 22 March, 2010. ADVISORY. Australian PPP debt pre-GFC. Monoline-wrapped bonds the norm Market capacity over A$10 billion Single underwriter Strong competition

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INFRASTRUCTURE & PROJECTS GROUP

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  1. INFRASTRUCTURE & PROJECTS GROUP Guarantees and Government Financing for PPPsPPP Days 201022 March, 2010 ADVISORY

  2. Australian PPP debt pre-GFC • Monoline-wrapped bonds the norm • Market capacity over A$10 billion • Single underwriter • Strong competition • Long tenor debt, close to project term (25+ years) • High gearing • Spreads/margins of c. 0.70% • Strong appetite for usage risk New Royal Children’s Hospital, Melbourne

  3. What are the problems now? • Most monolines closed • Capital markets effectively shut • Bank market: • Capacity has contracted • No underwriting • Loan tenors of 5 – 7 years • Other terms more conservative • Short commitment periods (90 day max) • Margins c. 3.00% • No market appetite for usage risk

  4. PPP fundamentals remain strong • Value for Money to Governments • Attractive to contractors, operators and financiers • Stable, high quality, long-term revenues • Well defined, sensible risk allocation • Underlying credit rating is low investment-grade Schools PPP project, Victoria

  5. Why do we need private debt? • Without private finance, risk transfer is ineffective • Limited availability of equity finance • Lenders bring rigour and discipline • equity investors are often over-optimistic • due diligence investigations do change bids • lenders’ control mechanisms do prevent problems

  6. How to access capacity most efficiently? • Maximise competition • only require [25%] of debt at bid stage • funding competition for winner • Government underwriting /syndication guarantee • allows access to full market capacity • Government senior debt to cover any funding gap • doesn’t affect basic risk allocation • can be refinanced when market capacity allows but • requires experienced staff • conflict of interest Desalination project, Victoria

  7. Other solutions have problems • Government financial guarantees • substantially reduce risk transfer • Capital grants • distort risk allocation unlessrelatively small • Supported Debt model • has complex inter-creditor issues • doesn’t really address market capacity SE Queensland Schools

  8. Government may need to share refi risk • Refinancing risk is a direct result of the GFC • Risk is essentially one of debt margin • PPP Co bearing it may not be VFM • Government bears this risk already on its own debt • Risk is similar to insurance risk after 9/11 However • PPP Co should be incentivised to manage its finances • Risk upside must not lead to super-profits for PPP Co

  9. Possible refinancing risk sharing mechanism + -

  10. Government can accept uncommitted debt • Many countries do not require committed debt in bids • How to mitigate risk of changing terms • lenders commit to terms for as long as possible • lenders commit to rest of bid • any changes to finance terms must be fully transparent • reconfirm finance terms before final evaluation • move rapidly to financial close

  11. Governments need to mitigate usage risk • “User pays” PPPs are attractive • they limit budget impact • Government could guarantee minimum usage • lenders likely to base debt amount onguaranteed level • equity could have a large upsideunless capped or shared • Government could remove usage risk • make payments based on availability and performance • fund these payments from user revenue Hills M2 Motorway, NSW

  12. Presenter’s contact details David Asteraki Director, IPG, KPMG +61 2 9295 3858 / +61 450 958 348 dasteraki@kpmg.com.au www.kpmg.com.au

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