Understanding the Risks and Challenges in Developing by Public-Private Partnership (PPP)

1. Developing by Public Private Partnership (PPP): Risks & challenges for private developers/ investors’ participation. Vicky D. Kefala MBA Finance, BA Economics Head, Investments & Development Projects Consolidated Contractors Company (CCC) PRESENTATION – DEC.2015

2. Developing by Public Private Partnership (PPP): Definition, Characteristics, Structure PPP in Various Sectors Risks & Evaluation Challenges Major Players in PPPs Conclusions & closing remarks Project Data & Charts throughout Vicky D. Kefala, BA Econ., MBA Finance

3. Public Private Partnerships – What are they? PPP PFI P3 • A collective name for projectscarried out between public bodies and private companies • The Public Sector defines the output specifications for an asset and /or a service and the Private Sector delivers them • An alternative way of funding projects by bringing private finance to public sector projects Vicky D. Kefala, BA Econ., MBA Finance

4. PPPs -Main Characteristics • An arrangement between public and private sector whereby the private entity implements a project (asset & service) according to specifications • Assuming the risks and receiving the benefits (payments and/or revenues) for a significant period of time • Αppropriate allocation of resources, risks, rewards, responsibilities and obligations -> CONCESSION AGREEMENT Vicky D. Kefala, BA Econ., MBA Finance 4

5. Typical PPP Structure Public Sector (ministry, municipality, national road company) Partnership Agreement (DBFM) Special Purpose Vehicle (SPV) Equity Funding Banks, Multilaterals (EBRD, Development Banks) Financing Agreements Shareholders Agreement Design & Construction Agreement Operating (or Facility Management) Agreement Contractors Service providers (Operator or Facility Manager) Vicky D. Kefala, BA Econ., MBA Finance 5

6. PPP SECTORS • Transport & Infrastructure • Motorways • Bridges • Tunnels • Railways • Airports • Ports Rio - Antirrio Attiki Odos • Fuel, Environment & Energy • Waste Collection • Waste Recycling & • Treatment • Wastewater Treatment • Waste to Energy Plants Vicky D. Kefala, BA Econ., MBA Finance 6

7. PPP SECTORS 14 +10 Schools in Attica • Health • Hospitals • Treatment Centers Education Schools Universities University Housing Vicky D. Kefala, BA Econ., MBA Finance 7

8. PPP SECTORS Public Order • Police Stations • Fire Brigade Stations • Prison Facilities 7 Fire Stations Greece • Defence • Defence Academies • Simulator & Training Facilities • Others • Street Lighting • Recreation & Culture • Telecoms Vicky D. Kefala, BA Econ., MBA Finance 8

9. PPPs – Key participation considerations Country / Sovereign Ratings (investment grade) Legal / regulatory framework Political –instability, restrictive regimes, war Economic – crisis, inflation, interest rates volatility Project Technical difficulty & characteristics Contractual documentation (obligations, compensation, relief events) Sponsor (partners) Partner companies capabilities, structuring (who is leading where), robustness Financing Ability to secure funding, terms Market conditions Inconvertibility, f/x (country & contractual)

10. PPP Risks: from start to end Start-up Expenses………..Investment………………………….Dividends….…….……. • Handover problems • Land availability • Planning deficiency • Poor public-decision making / delays • Permit / Approval Risk • Interest rate volatility • Financial legislation change • Poor financial Markets • Inflation rate volatility • Poor market interest of project • Inappropriate capital structure • Lack of design flexibility • Design changes • Design deficiency • Completion delay • Construction Cost overrun • Defects / poor workmanship • Safety Risk • Interest rate volatility • Inflation rate volatility • Legislation change • O&M cost overrun • Market demand fluctuations • Environmental problems • Operator inability • Public opposition to high prices • Safety problems • Interest rate volatility • Inflation rate volatility Source: Adapted from Risk Identification & Assessment in PPP infrastructure projects using fuzzy analytical hierarchy process and life-cycle methodology, Jie Li and Patrick X.W. Zou

11. Streams of expected, risky cash flows, occurring for a long period in the future (25-35 yrs) for which there is no absolute comparable PPP Valuation Challenges Data availability Large, periodic sample of different infra sectors over their lifecycle Type of investments financed in the past not representative of today Term structure of expected returns Dynamic risk profile – discount factors over time- projects have multiple phases Sequential resolution of uncertainty Fixed term No unique price No traded equivalent (infra funds vs developers) Subjective valuation of an asset by different investors Project and investor characteristics create an equation with 2 unknowns- no direct solution Source: The Valuation of Privately-Held Infrastructure Equity Investments – Jan 2015 EDHEC-RISK institute

12. PPP Participation & Evaluation - challenges Strategic, Overall Fit, synergies Country, project, partner risks Financing available Risk Mitigation / Cash Flow reliability Risks - manage best and for least cost Insurance – typical construction, business interruption, political Contingencies Discount Rate, NPV & IRR What discount rate to use (single rate) Positive NPV Free post tax cash flows Source: The Valuation of Privately-Held Infrastructure Equity Investments – Jan 2015 EDHEC-RISK institute

13. PPPs in EUROPE Projects by Value and Number of Projects Number of Projects EUR billion EUROPE 82 closed vs 80 in 2013 68 in 2012 EUR 18.7bln vs EUR 16.3 bln Source: EPEC Market Update 2014 – Feb. 2015 Vicky D. Kefala, BA Econ., MBA Finance

14. Europe: PPPs by Sector for 2014 – Value and Projects SECTOR BREAKDOWN 63% in Transport 11.8bln 23 projects in Transport Healthcare – 15 deals 14 projects in Education Source: EPEC Market Update 2014 – Feb. 2015 Vicky D. Kefala, BA Econ., MBA Finance 14

15. Public Private Partnerships (PPPs) Major Players Μajor corporate, funding and advisory entities: • Construction & Development companies • Funding institutions (commercial banks, multilaterals, DFIs) • Private equity, infrastructure funds • Consultants (financial, technical, legal, insurance)

16. Major PPP Players: • 1- Construction & Development companies Top 10 PPP Transportation Firms Company Country (US $B) Ferrovial/Cintra Spain 73.5 ACS Group/Hochtief Spain 72.0 Vinci/Cofiroute France 70.7 Macquarie Australia 48.2 Bouygues France 38.6 Egis Projects France 26.6 Sacyr Spain 21.8 John Laing United Kingdom 21.4 Global Via Spain 19.8 OHL Spain 18.2 Source: Public Works Financing 2013 Survey of Public-Private Partnerships, October2013

17. Major PPP Players: 2- Funding Banks & Institutions LENDING BANKS / LEAD ARRANGERS BTMU State Bank of India China Develop. Bank SMBC Mizuho Korea Develop. Bank Credit Agricole Barclays HSBC ING Commonwealth Bank of Australia Unicredit Deutsche Bank Goldman Sachs Standard Chartered • MULTILATERAL / ECAs • JBIC/Nexi • US Ex-Im • Kexim/K-Sure • IFC/MIGA • China Exim/Sinosure • EIB • EKF • SERV • GIEK

18. Major PPP Players: 3- Infrastructure Funds RANK FUND NAME BASED US$ B 1 Macquarie Infrastructure and Real Assets Australia $23.34 2 Brookfield Asset Management Canada 18.48 3 Global Infrastructure Partners United States 16.47 4 Borealis Infrastructure (OMERS) Canada 6.78 5 IFM Investors Australia 5.85 6 Alinda Capital Partners United States 5.48 7 Caixa Economica Federal Brazil 5.20 8 Korea Infrastructure Investments South Korea 4.61 9 EQT Sweden 4.18 10 SteelRiver Infrastructure Partners United States 4.16 11 Morgan Stanley Infrastructure United States 4.00 12 ArcLight Capital Partners United States 3.91 13 InfraRed Capital Partners United Kingdom 3.85 14 JP Morgan Asset Management United States 3.48 15 Citi Infrastructure Investors United States 3.40 16 Goldman Sachs Principal Investment Area United States 3.38 17 Ardian France 3.16 18 Meridiam Infrastructure France 2.88 19 Infracapital United Kingdom 2.68 20 Kohlberg Kravis Roberts United States 2.41 Source: Infrastructure Investor, December 2013, p. 30

19. Major PPP Players: 4- Consultants LEGAL ADVISORS Allen & Overy Norton Rose Ashurst Pinsent Masons Hogan Lovells Chadbourne & Park Linklaters White & Case Clifford Chance Trowers & Hamlins • FINANCIAL ADVISORS • Ernst & Young • PwC • KPMG • Credit Agricole • BNP Paribas • SBI Capital • ΗSBC • BTMU • Rothchild • SMBC • Green Giraffe Energy Bankers • TECHNICAL ADVISORS • Mott McDonald • Atkins • Fichtner • Babcock & Brown • Arup • McBains Cooper • INSURANCE ADVISORS • Marsh • Jardine Lloyd Thompson • ΑΟΝ

20. CONCLUSIONS • Concession model recognizes the role of private sector • A tool to attract private investment • A complex investment with many stakeholders – good understanding of structure, risks & challenges • Many projects around the world developed by PPP / BOT-great opportunities Vicky D. Kefala, BA Econ., MBA Finance 20

21. PPP References – EUROPE & GLOBAL • EUROPEAN INVESTMENT BANK (EIB) http://www.eib.org/epec/about/ • WORLD BANK http://ppp.worldbank.org/public-private-partnership/ Vicky D. Kefala, BA Econ., MBA Finance Vicky D. Kefala, BA Econ., MBA Finance

22. THANK YOU • Vicky D. Kefala • MBA Finance, BA Economics • Head, Investments & Development Projects • CONSOLIDATED CONTRACTORS COMPANY (CCC) 23