Infrastructure Finance Nikos Mantzoufas PPP Secretary, Greece

1. Infrastructure Finance Nikos Mantzoufas PPP Secretary, Greece

2. Infrastructure Finance Contents Key Questions Lessons Learned Routes to Finance Infrastructure Sources of Infrastructure Finance Social Infrastructure PPPs – Global PPPs in Europe Role of European Investment Bank & PPPs Role of European Investment Bank & PPPs in Greece Hellenic PPP Practice: EU Grants & PPPs: Unfolding “blending”

3. Infrastructure Finance Key Question 1: What do we consider as infrastructure? • Transport facilities (air, sea and land) • Utilities (water, gas , electricity) • Flood defense • Waste management • ICT Networks • economic infrastructure • projects that generate economic growth and enable society to function. • social infrastructure • assets to support the provision of public services. • Educational Establishments • Public Buildings • Urban Development • Health Facilities

4. Infrastructure Finance Key Question 2: Why do we need infrastructure? Economic Growth Every EUR spent on public economic infrastructure further increases GDP by 0.05-0.40 Looking Further… Competitiveness Social Impact Access Connection Safety The set of institutions, policies, and factors that determine the level of productivity of a country. Sustainability & Environmental Impact Energy Supply Mix Better Quality Standards Safe Maintenance (pipes, transport) Key competitiveness index! Quality of Infrastructure Medium to Long Term

5. Infrastructure Finance Key Question 2: Why do we need infrastructure? Global Infrastructure Gap “The difference between infrastructure needs and infrastructure spending” Shortfall of Supply and Demand US $ 1 TRILION or 1,25% of Global GDP Infrastructure Spending or Supply (amount that is being invested in infrastructure ) = $2.7 trillion per year Is Lower than infrastructure needs or Demand (amount that OUGHT to be invested) = $3.7 trillion per year $57 trillion will be needed in infrastructure investment between now and 2030 – simply to keep up with projected global GDP growth. McKinsey Global Institute Infrastructure investment both to maintain existing and build new, remains a challenge, for example in emerging economies 880 million people live without safe drinking water. While global infrastructure requirements are huge, governments’ fiscal budgets are increasingly constrained.

6. Infrastructure Finance Key Question 3: How to fund and finance infrastructure? Revenue sources Infrastructure Funding General Purpose tax revenues Revenues from user charges Other charges or fees dedicated to infrastructure Revenue sources that are turned into capital TODAY to build or improve infrastructure Infrastructure Financing Only if funding infrastructure issues are addressed, financing options will expand. Successful Infrastructure Projects have three (3) characteristics in common: Strong Underlying Business Case Support by a strong financing and contractual structure Depend on sustainable funding sources Source: World Economic Forum - Accelerating Infrastructure Delivery – New Evidence from International Financial Institutions Key Constraint: Public Budgets - the largest contributor of infrastructure finance - have not recovered from the financial crisis worsening the gap in the market for infrastructure finance.

7. Infrastructure Finance Key Question 4: Who should pay for infrastructure? Users User charges are typically tied directly to the cost of producing the service for which the fee is charged. This source of funding is limited to those forms of infrastructure that are amenable to the collection of user charges. Moreover, infrastructure competes for space in household budgets. 1 Governments have two (2) options to pay for projects’ construction & operating costs Tax -Payers Own Resources Tax Receipts / Asset Sales / Bond Launches 2 Public Private Partnerships Project Finance Solutions Mixed user-pay & tax payer funding solution 3 Without predictable revenue sources the broader benefits of a project can never be realized.

8. Infrastructure Finance Key Question 5: Which method of procurement should governments choose for infrastructure? Traditional procurement: governments design infrastructure assets & tender out the construction works to the contractor who has the lowest price. If the government uses traditional or design & build procurement approaches: it must ensure that sufficient funds are set aside for routine maintenance and, that the maintenance quality is monitored. 1 Design & Build contracts: require private sector contractors to tender for designing and building the infrastructure. 2 Whole life-cycle cost of assets: require either public works departments to optimize the whole life-cycle cost in the design, building and maintenance of assets OR it can invite the private sector to build & operate assets with long-term contracts. Allows the initial investment & future maintenance cost relation - or Total “Ownership” Cost - to become clearer 3 “Even well-designed and built infrastructure will not achieve the intended benefits unless it is maintained.” - World Economic Forum

9. Infrastructure Finance Key Question 6: Assuming the government chooses whole life-cycle cost approach what are the criteria for governments to choose the public works route? Experienced in latest design techniques. Can minimize total cost of ownership. Able to negotiate and purchase construction materials more effectively than private companies. Able to build the assets more efficiently than private competitors. Able to maintain the assets to the required output/outcome-based specifications more effectively than private companies. If most of those criteria are not met the government may want to consider a privately provided Whole Life Cycle Cost approach. Public Private Partnerships A long term contract between a private party and a government agency, for providing a public asset or service, in which the private party bears significant risk and management responsibility. Source: World Economic Forum

10. Infrastructure Finance Key Question 7: What are the potential advantages of Public Private Partnerships? Or their value proposition? Key Fact: Transactions require the devotion of multiple stakeholders with conflicting goals. Potential Advantage Description “White elephant” or Wasteful projects – economically underproductive projects - are potentially filtered out as both the government and private investors tend to conduct a very thorough due diligence process Improved Project Selection Better on-time construction performance Principle of “no service-no payment” ensures that the private sector is incentivized to deliver to time Accelerated Delivery Accelerated Infrastructure Provision Applied lifecycle approach and assured maintenance High service quality Clearly defined governance structure On-going commitment to maintenance, leading to better asset condition Better defined project scope Improved output from defined service standards Enhanced Delivery • PPPs address the life-cycle dependencies between design, construction and operations effectively as they assign the full asset responsibility to a single party. • PPPs attempt to unbundle risks & allocate to the best party able to manage them. Whole life-cycle cost optimization

11. Infrastructure Finance Lessons Learned However PPP’s are not a PANACEA. What are the lessons learned from their challenges? Success in infrastructure investment, especially for Public Private Partnerships (PPPs) (which are generally very complex legally, financially and technically), is dependent on well designed projects i.e. on effective project preparation. High Level Panel – Recommendations to G20 Economic, Political and Execution hard-won lessons for successful PPPs

12. Infrastructure Finance Routes to Finance Infrastructure Investments Financing perspective ? infrastructure opportunities are usually capital intensive there is a tangible asset to operate and maintain, and the asset is expected to generate cash over the long term. Both equity and debt can be used to finance infrastructure projects. While evaluating the financing of infrastructure projects, careful consideration needs to be given to risk and uncertainty. Global Project Finance Deals for 2013: 548 Global Project Finance Volume: US $280 billion Closed Deals – Social Infrastructure: 58, US$13 billion Source: Infrastructure Journal

13. Infrastructure Finance Sources of Infrastructure Finance DEBT + EQUITY = CAPITAL STRUCTURE There are two main reasons why the capital structure is important. First, understanding the likely leverage will give an indication of the amount of debt and equity that may be needed to finance an infrastructure opportunity. Second, knowing the likely proportion of debt to equity will help determine the cost of the transaction because equity carries more risk than debt and is also a more expensive form of finance. Certain Issues need to be addressed What about Project Bonds?

14. Infrastructure Finance Sources of Infrastructure Finance The biggest lenders to infrastructure are no longer the European banks. Asian banks and Australian institutions have continued to usurp this historic paradigm. Across the medium and long term many governments would benefit from establishing and maintaining more structured and systematic processes around the tendering and management of projects. A more direct approach to infrastructure development should see the markets rise still further, whilst the creation of a greater internal capacity to lead projects in national governments will open the way for greater private investment.

15. Infrastructure Finance Sources of Infrastructure Finance Pre-financial crisis Post-financial crisis Project Bond Financing Project bonds are debt instruments issued by PPP project companies & bought by institutional investors. European PPP market relied heavily on project finance debt provided by commercial banks and/or public financing institutions (e.g. EIB) Commercial bank debt ? More difficult to secure and lending terms (e.g. pricing, tenors, loan volumes) have deteriorated. “They can play a major role in bridging the financing gap for infrastructure investments.” EPEC 2012

16. Infrastructure Finance Social Infrastructure PPPs - Global • The sector received US$13 billion in infrastructure investment across 58 projects; out of this US$10 billion was debt. • The social infrastructure sector was dominated by healthcare (24 per cent), education (23 per cent) and waste/recycling projects (18 per cent). Drivers & Risks Government spending reductions are still adversely affecting the global pipeline of social and defence projects, with various national administrations reluctant to antagonise the electorate with high capital spending programmes.

17. Infrastructure Finance PPPs in Europe • 80 PPP transactions reached financial close in 2013, significantly more than the 68 recorded for 2012. • The average transaction size increased to reach EUR 203 million (EUR 188 million in 2012) in 2013. • Over 90% of the transactions closed were authority-pay PPPs (e.g. availability payments). Only six projects involved user payments or the transfer of demand/traffic risk. Source: European PPP Expertise Center

18. Infrastructure Finance Role of European Investment Bank & PPPs • The EIB: • Has long-standing experience in the analysis and successful closing of infrastructure Public Private Partnerships (PPPs). • Since 1990 has progressively broadened the geographic and sectorial spread of its PPP lending and is now one of the major funders of projects in Europe with a portfolio of 130 projects and investment of around EUR 30 billion.

19. Infrastructure Finance Role of European Investment Bank & PPPs in Greece EIB has financed three out of three PPP – Availability Payment transactions in Greece European Investment Bank EUR 9 million April 2009 EUR 19,1 million April 2014 EUR 16,7 million May 2014 Attica Schools 2 SPV Fire Stations SPV Attica Schools 1 SPV

20. Infrastructure Finance Case Study 1: Role of Multinational Development Banks Case Study 1 – Revenue Backed Finance - the Panama Canal In 2008, five MDBs (European Investment Bank, the Japan Bank for International Cooperation, the Inter-American Development Bank, the International Finance Corporation and Corporacion de Fomento) offered US$ 2.3 billion to finance part of the US $5.2 billion Panama Canal Expansion. Why approach the MDBs? The finance was raised at the time of the Lehman Brothers bank collapse. MDBs were selected as they were able to offer longer-term loan than commercial banks. How will the MDB loans be repaid? The loans are not secured against the new canal, but rely instead on being funded from future toll charges. Source: Adopted from WEF Report

21. Infrastructure Finance Case Study 2: Bridge PPP Case Study 2 – Disraeli Bridges PPP - Canada The Disraeli Bridges project is a 2-kilometer (1.2-mile) PPP initiative consisting of two new vehicular structures and three new stretches of reconstructed roadway. The existing bridge over the Red River was retrofitted as an active transportation corridor. PlayPrevious 4/5 Next Disraeli pedestrian bridge under construction Close Background: The bridges were originally constructed in 1959-60. A condition assessment found numerous deficiencies that need rehabilitation or upgrade. The City of Winnepeg will make payments to Plenary (SPV) based on a lump sum payment upon commissioning that provides partial payment for capital costs, followed by regular payments over 30 years that pay for the remainder of the capital cost as well as regular maintenance costs. “This active transportation bridge is all about cyclists and pedestrians’ safety and helping to reduce gas emissions by promoting active living,” declared MP Toet, on behalf of the Minister of Infrastructure, Communities and Intergovernmental Affairs. Finance Type: Project Finance Concession: Design Build Finance Maintenance Operate Concession Period:30 years PPP: Yes Value:$154.72m USD Equity:$14.69m USD Debt:$140.03m USD Debt/Equity Ratio:91:9 Financial Close: 2010 Operation Commencement: 2013 Source: Adopted from Infranews

22. Infrastructure Finance Hellenic PPP Practice: EU Grants & PPPs: Unfolding “blending” European Union Structural Funds 1 • Robust investment planning • Safeguarded projects from a legal, technical and financial perspective • Transparency in PPP finances • Long established institutions • Adaptability to market needs European Investment Bank 2 JESSICA 3 Private Investment 4 Blending EU instruments with private capital addresses specific challenges. This process enables for a coherent and controlled procedure that is safeguarded from a variety of institutions. Project Delivery Project Inception 22

23. Availability Payments by the State Construction phase Private Investment Operational phase Infrastructure Finance Hellenic PPP Practice: EU Grants & PPPs: Unfolding “blending” Case Study 1: Attica Schools PPP (€ 110 mil) • The Schools Organization will award the PPP contract for the Design-Build-Finance-Operateand Maintenance phases to the private entity through a single DBFO contract. -Loan repayment -Operational, maintenance etc costs -Dividends EIB JESSICA EIB’s role to support the PPP drive in Member States towards the improvement of public services through increased private sector participation is highlighted in the Schools Project with a 40% loan participation. JESSICA Investment Board approved funding of 40% on favorable terms against commercial banks, based on the viability of the project. 23

24. Availability Payments by the State Construction phase Private Investment Operational phase Infrastructure Finance Hellenic PPP Practice: EU Grants & PPPs: Unfolding “blending” • Case Study 2: Attica Urban Transportation-Automatic Fare Collection System & Telematics System (€ 129 mil & € 52mil) • Both projects are through a Design-Build-Finance-Operate contract for 10 years. • First ICT PPP projects to be implemented and at the same time the first initiative in Greece, to combine EU funds with private finance in availability-based PPP projects. -Loan repayment -Operational, maintenance etc costs -Dividends EU grants JASPERS was a critical member in the financial and socio-economic analysis conducted by the Awarding Authority (Organization for Athens Urban Transportation). European Regional Development Fund approved the funding of €30 mil. 24

25. Infrastructure Finance Hellenic PPP Practice: EU Grants & PPPs: Unfolding “blending” Case Study 3: Broadband development in Greek rural areas (> € 200 mil) • The Project was subject to individual notification on the compatibility of Aid. • Following the European Commission’s assessment of the measure, the decision (SA.32866) was issued on 10.11.2011 stating that the measure is compatible with the internal market, pursuant to the Treaty on the Functioning of the European Union (TFEU). Fair profit margin level Construction phase Revenues by the private investors Private Design, Build & Construction VAT -Loan repayment -Operational, maintenance etc costs -Dividends Operational phase EU grants JASPERS CLAW-BACK MECHANISM: if “profits surpass the level of a fair profit margin then a percentage of the exceeding part may remain at the contractor’s disposal, increasing its total profit levels, while the majority percentage of the exceeding part will form a special taxable reserve which can be used during the next year for specific broadband development initiatives.” 25

26. Infrastructure Finance Hellenic PPP Practice: EU Grants & PPPs: Unfolding “blending” Case Study 4: Waste Management Projects • Design, financing, construction, maintenance and operation of the respective waste management facilities for a period of 25 years. Gate-Fee Revenues by the private investors Construction phase Private Investment -Loan repayment -Operational, maintenance etc costs -Dividends Benefit from use of EU grants & potential 3rd party revenues JESSICA Operational phase EU grants • Objectives for Waste Management Projects • To reduce the usage and impact of illegal landfills • To complement the Region to meet EU landfill diversion targets for 2020 • To achieve a fair gate fee • To effectively absorb available EU funding opportunities 26

27. Infrastructure Finance Hellenic PPP Practice: EU Grants & PPPs: Unfolding “blending” Case Study 5: Western Macedonia Waste Management Project • Design, financing, construction, maintenance and operation of the Integrated Waste Management System in the region of Western Macedonia for a period of 27 years. Gate-Fee Revenues by the private investors Construction phase Private Investment -Loan repayment -Operational, maintenance etc costs -Dividends Benefit from use of EU grants & potential 3rd party revenues EIB Operational phase JESSICA • The first waste management project is heading towards the announcement of the preferred bidder. • EIB’s participation approved in principle. No EU grant funding 27

28. Infrastructure Finance Nikos Mantzoufas PPP Secretary, Greece