M6 Motorway PPP Project, Hungary: A Case Study David Asteraki, ING Bank NV

1. M6 Motorway PPP Project, Hungary: A Case Study David Asteraki, ING Bank NV IFSL PPP Seminar, Athens26th May 2005

2. PPP Road ProjectsA great international success • Widely used across Europe, North America, Asia, Australia, South Africa, etc. • Numerous studies have demonstrated value for money • There is keen interest from: • Construction contractors • Operators • Financial investors • Debt financiers (banks, bond investors, bond insurers) • Procurement can be quick and efficient

3. M6 Motorway, Hungary Based on availability payments 1st stage tender (pre-qualification) launched 31 January 2004 2nd stage tenders (3) submitted19 July 2004 Project Contract signed 2 October 2004 Financial Close 15 December 2004 10½ months in total ING advised Hungarian Government M8 Fermoy Bypass, Ireland Based on mix of real tolls and construction & operating grants Pre-qualification launched June 2002 Initial tenders (4) submitted November 2002 BaFOs (2) submitted December 2003 Project Contract signed and Financial Close June 2004 2 years in total ING arranged and provided debt finance M6 Motorway Procurement TimetableAn international record

4. M6 Motorway Project, Hungary • Awarded by National Motorway Company on behalf of Ministry of Economy and Transport • Awarded to consortium of Bilfinger Berger, Porr & Swietelsky • Final design, construction, financing, operation and maintenance of motorway over 22 years • 58 km of dual two-lane motorway, 10 junctions, 54 bridges between Érdi tető (SW of Budapest) and M8 at Dunaújváros • Includes some works to local roads • Total Project value approximately €480 million • €411 million of debt finance with tenor of 20.5 years

5. Hungary: Planned Motorway Network to 2015M6 forms key part

6. M6 Motorway Project: A Great Success • Procured in record time • Construction timetable meets Government objectives • Good risk transfer to private sector • 4 strong international consortia submitted 1st stage bids • 3 strong 2nd stage bids received • Government’s risk allocation broadly maintained • Good Value for Money • Construction, O&M and finance costs all competitive

7. Why was the M6 Project such a success? • Strong political support and commitment • Supportive public sector decision making process • Sensible approach to market • Standard risk allocation • Standard Project Contract and Financiers’ Direct Agreement • Availability-based payment mechanism • No net traffic risk • High quality public sector advisors

8. Strong Political Support and Commitment • Government as a whole committed to PPP projects • Strong personal support from Minister of Economy and Transport Istvan Csillag and his deputy Imre Rethy • Absence of real tolls paid by motorists reduced political risk • Renegotiation of M5 Motorway Project gave good precedent • Political imperative to remove real tolls required PPP structure • Initial support and commitment made decision making and approval much easier

9. Effective public sector decision making process • Negotiating team had: • Clear, realistic mandate with delegated decision authority • Ready access to ultimate decision makers (Ministers Csillag & Rethy) • Strong leader (Fruzsina Biro) with commercial experience • Commitment and willingness to work hard! • There were no rival decision makers • All parties bought into negotiating team’s mandate

10. Sensible approach to market • Announcement in international press • Well developed initial information package • Project description • Initial design • Indicative risk matrix • Payment mechanism • Transparent criteria for selecting tenderers • Well developed Invitation to Tender/Negotiate • Full draft Project Contract including schedules • Transparent criteria for selecting winning tender

11. Standard risk allocationBased on market standards that have built up over time • No significant deviations that favoured the public sector: • Minimised delays and legal costs during negotiations • Maximised value for money due to familiarity with risk • No unmanageable risks • Public sector bears risk of approvals, land acquisition, etc. • Eurostat rules now favourable to standard PPP projects: • Private sector need bear only minimum of construction risk and either demand risk or availability risk for Project to be off balance sheet • Key issue is compensation on termination for default • Compensation 65% of value of Project to the Government • No automatic full repayment of debt

12. Project Contract and Financiers’ Direct Agreement • Based on existing precedents (UK OGC Guidance) • Familiarity among tenderers and advisors shortened negotiations • Risk allocation is more obvious • Limited need for new drafting, minimising legal costs • UK OGC Guidance is widely accepted • English language used, even though under Hungarian law • Made project more attractive to international tenderers • Eliminated translation costs and time

13. Availability-based payment mechanismPrivate sector bearing traffic risk reduces value for money • Private sector has very limited ability to manage or mitigate • However, investors and financiers have been willing to bear it • Private sector bearing ANY net traffic risk lengthens procurement period and adds to tender costs • Tenderers and their financiers both require detailed analysis • Financiers particularly are conservative and require higher margins and cover ratios • “Green field” project reduce predictability of traffic volumes • Overall, likely to lead to more expensive project

14. How do availability payments work? • Predefined level of gross payments (focus of tender) • Payment deductions for unavailability depending on: • Length of road affected • Number of lanes affected • The use of contraflow (on grounds of reduced safety) • Duration of unavailability • Time of day (higher in peak hours), day of week, season • Lanes “unavailable” if not usable or unsafe • Periods of maintenance included, to incentivise minimum disruption • Exclusions for external events (snow, accidents) • Additional deductions for poor performance of services

15. Strengths and weaknesses of availability payments • No politically difficult real tolls • No private sector traffic risk premium • Minimises Project cost • Procurement period minimised • No need to undertake traffic studies BUT • Not favoured by EU (prefer “user pays”) • High impact on public sector budget

16. Public sector advisorsFinancial, legal, technical • Extensive international experience • True for team members as well as company • Depth of resources • Fee rates may be high for quality advisors, BUT their experience leads to: • More efficient procurement with likely lower overall cost • Better value for money project • Using cheap but inexperienced advisors is false economy