Public Private Partnerships – Risks which a Lender may assume

1. Public Private Partnerships – Risks which a Lender may assume 30 September 2005 Jonathan Drew HSBC Corporate, Investment Banking and Markets

2. Contents • A Typical PPP Structure • Benefits of Third Party Funding • PPP Risk Allocation and Lenders Appetite • Risk Allocation and Finance Structures • Financing Issues and Implementation

3. A Typical PPP/PFI Structure Government Performance Payments Construction Services Debt Finance Special Purpose Vehicle Equity Operation

4. Benefits of Third Party Financing • Access to wider sources of capital for large scale funding requirements • Improved and more secure funding streams • Assists short term budget management • Capital at risk motivates participants to achieve a more efficient outcome • Lower risk to public sector due to rigorous private financing process • Credit provider will seek to ensure adequate protections and mitigants are in place • Government retains operational and planning responsibility • Government pays only when project are available and performance is up to standard • Ability of private sector to deliver on cost effectiveness/efficiencies – offsets higher financing costs • Better value through risk transfer, whole life costing and competitive process Certainty of Funding Appropriate Risk Allocation Value for Money Public Sector can focus on delivery of core service functions

5. Estimated costs Government exposure Lenders Repayment Mechanism PPP/PFI Funding/Payment Approach Traditional Public Funding/Payments $ $ Exposure to construction cost overruns No payments until facilities available for use Dollar amount of the service payments locked-in prior to commencement Exposure to construction time overruns Exposure to operating cost overruns Time Time Construction period Operations period Estimated costs Government exposure

6. A PPP contractual structure – appropriate risk allocation Conventional procurement Typical PPP/PFI • Design & construction • Design & construction • Service provision • Maintenance and renewal • Service provision • Pre-existing conditions • Maintenance and renewal • Regulation/policy • Market / Volume • Pre-existing conditions • Regulation/policy • Market / Volume Private sector Government

7. Lenders Risk Analysis Model • Approvals and Permits • Technology • Construction • Funding • Market / Demand • Operational • Change in Regulations / Law • Force Majeure Rule of Thumb: Lenders will accept and price risks they can adequately assess and/or the Borrower can adequately manage

8. Typical PPP/PFI Finance Structure • The finance structure depends on the level of risk in the Project. • Loans to the project company can be structured on a limited recourse basis • Lender will assess whether debt can provide for the majority of the capital requirements of the project. • Debt repayment will be significantly tied to the performance on the Project • A higher level of gearing typically reduces the overall cost of the Project

9. Risk Allocation and Finance Structures • Lender will undertake extensive due diligence to measure risk implicit in the repayment mechanism • Lenders acceptance of risk allocation will be a function of the factors which affect predictable cashflows over the concession life • Key risks which may not appropriately transferred to the private sector include • Political/Policy Risk • Long Term New Technological Risk • Market / Volume Risk • Inappropriate risk transfer to the private sector may lead to • Lower gearing • Higher Pricing • Shorter Tenor Risks not well managed by private sector. Higher risk of project failure Higher Overall Cost to Government

10. Asia World Expo Hong Kong (Dragages et Travaux Publics, NEC, Yu Miing Investments) Project International Exhibition Centre Awarding Authority Hong Kong SAR Government Case Study - Infrastructure - AsiaWorld Expo • Contractual Structure

11. Case Study - Transport - Western Harbour Crossing • Contractual Structure Western Harbour Tunnel Company Limited (CHT, China Merchants, CITIC, Kerry) Project Western Harbour Crossing Awarding Authority Hong Kong SAR Government

12. 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 • Automatic toll adjustment mechanism • Challenging legislative process • Size • HK$5.2bn (of HK$7.5bn) • HSBC Role • Advisor and Arranger to private sector consortium Western Harbour Tunnel Company Limited (CHT, China Merchants, CITIC, Kerry) Project Western Harbour Crossing Awarding Authority Hong Kong SAR Government

13. Key Financing Issues in PPP/PFI Projects Macro Micro • Legal regime which permits taking of security and enforcement of contractual rights • Govt obligations undertaken by appropriate entities • Political Commitment to PPP and to specific projects • Competition and availability of participants • Availability / capacity of long term debt markets • Availability and establishment environment of equity participation • Transparent procurement process • Well defined projects, clarity on output spec • Strong and experienced contractors • Appropriate allocation of risk reflected in payment regime • High quality predictable cash flow – low volatility • Alternative suppliers • Ability to step in • Adequate termination protection • Protection from other adverse events, change in law, force majeure, insurance etc

14. PPP and Financing Implementation Process Procurement • Identify the requirement • Initial feasibility and assessment of value to Government - PSC • Initial prequel and expression of interest • Request for proposal • Review and evaluation of submissions • Negotiations and selection of preferred bidder • Negotiation with preferred bidder • Commercial close Involve industry private sector? Financing Process • Obtain financing proposals • Due diligence • Insurance • Technical/Environmental • Financial • Commercial • Legal Due Diligence • Documentation • Syndication of loan • Financial Close

15. Thank You