Transcript 슬라이드 1 - kzppp.kz

PPP Project Finance
Korea Development Institute
Public & Private Infrastructure Investment Management Center
Head of Finance and International Cooperation Unit
Kyong-ae Park
PIMAC
1. Basic Structure of PPP Project
2. PPP Project Finance
3. Refinancing
1. Basic Structure of PPP Project
3
Public Procurement VS PPP Project
 PPP Project is a type of public procurement including the design,
construction, financing, and operation of infrastructure facilities
 PPP has replaced the traditional public procurement
Public Procurement Project
PPP Project
•
Financing through general account
budget
•
•
•
Financing through tax (special
account)
•
•
Financing through the issue of
government bonds
•
Financed by Private Sector
Government assistance through
construction subsidy and minimum
revenue guarantee
Recovery of capital expenditure
through user fees (BTO)
Recovery of capital expenditure
through facility lease fee (BTL)
4
PPP Project의
Location
of PPP 의의
Project
 PPP project supplements government finance by constructing and
operating social infrastructure facilities, which are constructed and
operated on government budget
 PPP uses the creativity and efficiency of the private sector
Traditional
Governmen
t
Procureme
nt
Outsourcin
g
3rd Sector
PPP
Privatization
Spectrum of Private Participation
5
Reason for Introducing PPP Project
PPP Project의 장ㆍ단점
 Supplementation of Finance

Possible to push forward with a variety of infrastructure facilities in the early
stages with limited finance
 Uplift Efficiency

Integrates design, construction, financing, and operation to minimize Life Cycle
Costs (LCC)
 Disadvantages are that the borrowing cost of the private sector is relatively high
compared with that of the public sector
 PPP project can be carried out only when it reduces costs compared with government
projects(PSC, Public Sector Comparator) even after considering the cost increasing
factors of the PPP project (Value for Money)
 Enhance Level of Service


Expects enhanced level of service by specifying performance levels required in
the operation phase in advance
Possible to diversify services through the creative use of the facility
6
Structure of BTO Project
PPP Project 추진 방식
 BTO (Build-Transfer-Operate) PPP Project
Sponsor(SPC)
B
T
O
Provide
Service
Fee
User


Donate
Facilities
(Contributed
Acceptance)
Management /
Operation Rights
Central / Local
Government
SPC(Special Purpose Company) constructs and transfers facilities to the country
and obtains management and operation rights in return
Operates a business by collecting fees based on the management and operation
rights for a fixed period of time to recover investment
7
Structure of BTO Project
PPP Project의 장ㆍ단점
BTO (Build-Transfer-Operate)

① Loan, Investment
Financial
Institution
②Donation Default
Government
SPC
③Management and
Operation Rights
⑤Repayment,
Recovery
④Fees
④Service
User
BTO Project
 Mainly applied to road, railroad,
and port projects where the
investment can be recovered
through the fees that are charged
to the users
 As the investment is recovered
through the user fee, SPC directly
shoulders the demand risk
(fluctuation in user fee revenue)
8
PPP Project Return on Investment (ROI)
 Rate of Return On Investment


Sponsor: Weighted average capital cost (WACC) as the return on investment for
the entire investment capital (equity and debt)
Government: Return on total private investment recognized in terms of capital cost
 Concept used in determining user fee
 Competent authorities can determine the level of return on
investments by considering as follows;

Average loan interest rates of domestic and foreign financial institutions on
infrastructure facilities

The level of the return on investment of similar PPP projects

Project type

The risk sharing amount of the government during negotiations
9
Financial Resources of PPP Project
 The investment ratio for state controlled projects for which the
concession agreement is signed as of the end of December 2007 is
20.7% equity, 52.7% debt, and 26.6% government subsidy
 The central or local government can issue subsidies or provide longterm loans to the sponsor to carry out revertible facilities projects
smoothly
 Mostly construction companies participate as the equity holder in
PPP project in order to award construction contract

After construction they sell shares to long-term investors such as life insurance
companies, pensions and funds
 Mostly industrial banks, commercial banks, life insurance companies,
and pensions and funds participate in debt financing through
syndicated loans
10
Financial Resources of PPP Project: Equity
 The investor ratio is composed of 54.6% construction company,
10.2% bank and insurance company, and 6.0% infrastructure fund
 According to the PPP Basic Plans, equity ratio of total private
investment could be decrease to 15% when the financial investor
covers more than 50% of the equity


The share of construction companies in PPP project is decreasing after the debtto-equity ratio regulation is relaxed
The investment of financial institutions through infrastructure fund and so forth
increases
 Financial investors are passive in participating as the equity investor
due to the characteristic of the organization


As financial institutions are regulated to minimize investment loss, they have risk
averse attitude
Financial institutions can hardly play the leading role for the development and
investment of PPP projects
11
Financial Resources of PPP Project: Equity
 Financial institutions are participating in the share investment of
PPP projects in the form of infrastructure fund in order to avoid
regulations on investment restriction

Financial institutions are influenced by the 15% share investment restriction

The investment trust type fund without share rate restriction is preferred

Carry out with private equity funds, which are easy to recruit investors compared
with public offering funds

Private equity funds have advantages such as prompt decision-making process
12
Financial Resources of PPP Project: Equity
 Return On Equity (ROE, Dividend Rate)

Equity investors retrieve investments through dividend

Return on equity produced from cash flow in the position of shareholders
 input: payment of capital
 retrieval: recovery of dividends

ROE is the concept used in the position of investors when making decisions for
the execution of the project
13
Financial Resources of PPP Project: Loans
 The borrowed capital takes up to 70% or higher of the total private
investment cost



The borrowed capital is mostly procured through loans from domestic financial
institutions
Recently, other financing methods using bonds such as SOC bond and ABS bond
are sought, but the result is insignificant in terms of the number of bonds issued
Subordinated debt is also used and in particular, the cases where it is procured
through refinancing of completed projects are increasing
 Difficult to conclude financial contract for PPP projects since the
financial crisis


Recent projects have low rates or returns(the rate of return of road projects is
around 5∼6% (actual))
Minimum revenue guarantee is not applied
14
Financial Resources of PPP Project: Loans
 The common characteristic of recent financial contracts

Financial investors set a certain rate of return (ROI) for their capital gain

Construction investors should supplement the fund if this ROI is not achieved

Construction investors accept the requirements of financial investors
In most financial contracts, financial investors avoid demand risk



Establishing the financial structure where the project developer, the construction
investors, shoulder the demand risk
Financial investors make construction investors hold more stakes to minimize
their investment risks
15
PPP Project Financing
BTO Project
Loan 80-85%
(Prior, Subordinated)
 In BTO scheme, the investment
share should be at least 15% of the
total private investment cost
Equity 15-20%
 ROI: 6-8% or less,
 ROE: 10% or higher
Prior Loan
[BTO Project]
Subordinated Loan Recovery
equity
Prior Loan Recovery
Investment
and Loan
Balance
Dividend Recovery
(If certain conditions are met)
Construction
Period
Operation Period
0
5
10
15
20
25
30
Time(Year)
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Cash Flow of PPP Project
Construction
Period
Operation
Period
Cash Inflow
Operating Income (Cash Flow)
Equity
Construc
tion
Comme
ncement
Loans
Construction
Completed
Completion of loan
recovery
Construction
Profits
Dividend
Cash Outflow
Investment by Construction
Company
Loan Recovery
(Principle + Interest)
Private
Investment
Cost
Payment of
Interest
Interest During Operation
Term of Loan
Loan Repayment
Period
Investment
Recovery Period
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2. PPP Project Finance
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Financial Advisory Service and Arrangement
Financial Advisory Service
Collection of
Information for
Financing
Submission of
Financial
Financial
Advise
Advise
Proposal and
Contract
Consultation
for Conditions
Support for
Proposal
Preparatio Support for
Negotiation
n and
Evaluation
Select
Concession
Agreement Establishment Arranger
of Financing and Lead
Manager
Strategy
Bank
Financial Arrangement
Send
Request for
Borrower’s
Financial
Proposal
Prepare and
Send Terms
for Financial
Arrangement
Receive
Mandate
Letter
Carry Out
Due
Diligence
Prepare
Organization Prepare
Financial
Business of Syndication Financial
Agreement
Prospectus
Agreement
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Financial Arrangement Procedure
1) Send Request for Proposal



The borrower sends a request for proposal to the financial institution
The borrower gives priority to the financial arrangement capacity or the
syndication arrangement capacity of the corresponding financial institution when
sending the request for proposal
The borrower provides overall data summarizing the contents of the project
2) Prepare and Send Terms for Financial Arrangement to Borrower


Potential financial arrangers who received the request for proposal prepare the
terms for financial arrangement
Compose financial conditions that have competitive strength while
accommodating basic requirements such as the amount and expiration

Prepare terms & conditions and submit official letter of intent to the borrower

Carry out bid for selecting financial arranger with a number of financial institutions
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Financial Arrangement Procedure
3) Reception of Mandate Letter



The borrower shall compare the terms and conditions received from potential
financial arrangers and choose the one with best conditions
Issue mandate letter requesting for financial arrangement to the selected
organization (single or multiple)
The most important criteria in the selection process is the pricing and claim
preservation (security) structure
4) Execution of Due Diligence by Financial Arranger

Financial analyzer conducts due diligence for syndication

For the fairness of assessment, conduct reevaluation by an independent third party



The cost of due diligence is shouldered by the borrower, and the service contract is
concluded among the service company, financial institution, and borrower
Due diligence by the financial institution on the contents of project suggested by the
borrower in the request for proposal
Execute item by item on traffic volume (transportation), technology, law, accounting,
insurance, and operation sections
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Financial Arrangement Procedure
5) Prepare Information Memorandum



Prepared by the financial arranger to help the approval decision of the lending
party or the investing institution
The participating financial institution shall conduct an independent evaluation and
analysis by referring to IM
Major Contents: Overview of project, project structure and status of major
participants, required funds, financial conditions, traffic volume analysis,
construction plan, operation plan, insurance purchase plan, principal and interest
repayment capacity review (return on investment analysis for investment in
shares), termination payment review, project risk analysis, etc.
6) Formation of Syndication


Financial arranger prepares the syndication schedule and forms a syndication
team to carry out the procedure
Carry out in public offering fund (Open Market Syndication or General Syndication)
and private equity fund (Private Placement or Club Deal)
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Financial Arrangement Procedure
7) Preparation and Conclusion of Financial Agreement





The financial arranger requests the lawyers of the lending party to prepare the
draft for the major financial terms agreed with the borrower
Prepare the revision to be sent to the borrower through the review of the lending
party based on the draft
The financial arranger carries out the negotiation procedure for the contents of the
financial agreement with the borrower based on the revision
The financial arranger and the borrower confirms the financial agreement finally
through the consultation of their lawyers
Conclude financial agreement with the borrower
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Financial Arrangement Procedure
8) Contents of Claim Preservation

Acquisition of infrastructure credit guarantee

Termination payment

Establish prior collateral security for management and operation rights

Establish prior right of pledge for shares owned by investor

Management for all deposit accounts of the borrower

Establish prior right of pledge for the right for insurance proceeds


Security by means of transfer for overall contract rights of the borrower
(concession agreement, construction subcontract, management and operation
contract, etc.)
Save prior loan principal and interest for [ ] months after the beginning of the
operation to the debt service reserve account (DSRA) and other credit intensifying
conditions
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Investment Terms of Financial Institution
Terms of Investment
Type of Shares: Common Shares, Face Value: 5,000 Won
Acquisition Cost: 5,000 Won
Chargeability for cost overrun in case it occurs
Time and Condition for Capital Input: Pro-rata, investment order among
prior loan, government subsidy, equity, etc.
• Sales of Shares: Restriction for sales of shares
•
•
•
•
Terms of Dividend
Payment Restriction
• Start prior debt repayment
• Cumulative DSCR per half term [ ] times or more consecutively
• Completion of overall savings subject to obligatory savings such as debt
service reserve account (DSRA)
• Completion of the payment of various fees, principal and interest
• Must have no balance for stand by facility
Dividend and
Investment Principal
Recovery Plan (Exit
Plan)
• Minimum revenue guarantee on concession agreement
• Sellable period for the investment shares on shareholder agreement
• Investment principal could be covered by termination payment (in
concession agreement) and by retained cash balance
• Subordinated loan could be invested to prevent the lowering of the rate of
return due to non-payment of dividends during the construction and initial
operation period
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Positions of Sponsor and Lender
 Position of Lender






Requested for the procurement of debt capital by the sponsor
Minimize loan to promote stability for loan repayment
Maximize equity capital, request for credit enhancement device for shareholders
Risk Averter
Evaluate sponsor based on the loan principal repayment capacity (security, DSRA,
DSCR, etc.)
Expect appropriate net margin depending on the risk of the project
 Characteristics of Financial Agreement








Contract parties are SPC and Lenders
First priority in all monetary distribution of SPC should be the repayment of loan
Control cash flow through the agency bank (overall capital management such as
revenue management, cost management, etc.)
Determine the equity investment size of the sponsor
Restrict (investment agreement) sponsor’s overall cash flow
Restrict facilities supplier, O&M, and raw materials supplier other than the sponsor
Request for the sponsor’s credit enhancement tools (additional equity investment,
subordinated loan, cash supplement, etc.)
Agreement that covers overall risks that may occur during the loan agreement
26
Positions of Sponsor and Lender
 Position of Sponsor(Equity Investor)

Minimize the equity investment for maximum profit (net profit per share)

Low interest rate debt capital as much as possible to maximize equity capital gain

Risk taker

Evaluate Project on its profitability (IRR rate or return, NPV, etc.)

Expected return is the cash flow of dividend, and disposal(liquidating) value after
the repayment of loan
 Characteristics of Equity Investment Agreement
 Includes equity investment and operation among shareholders, decision making
structure, agreement for exit

Plan for sharing sponsor’s credit intensifying conditions

Accepts the overall conditions on the loan agreement

Tends to exclude restrictive conditions in order to secure autonomy of operation
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Subordinated Debts
 Subordinated Debt



Takes the form of debt
The repayment claim can be exercised after the prior debt is repaid
The interest is received according to certain predetermined conditions
 A mixed product with the characteristics of debt and capital (mezzanine finance)
 The financial institution issues subordinated debts in order to optimize the
weighted average financing cost




Subordinated loan appeared after financial institutions began to participate as
equity investors
In general Korean PPP project structure did not allow dividends or capital
reductions unless prior loan principal is completely repaid
Equity investors cannot earn the dividend revenue for 10 or more years after the
operation starts
Financial institutions use the method of combining subordinated debts and investor
capitals for the earning until they start to get dividend income
28
Subordinated Debts
 The interest rate for the subordinated loan is much higher than that
for prior loans



The interest rate for subordinated debts is determined to cover the weighted
average financing cost of equity and itself
The interest rate for the subordinated loan is determined based on the comparison
with the interest rate for the prior loan
The level of interest rate varies depending on:
 The equity amount of the financial investor
 The subordinated debt amount
 Negotiating power of the lender and sponsor
 The characteristics of the project such as traffic demand
29
3. Refinancing
30
Definition and purpose of refinancing
 Definition

Acts of changing equity structure, investor stake holdings and debt
financing conditions of the project by the project company compared to
the time when loan agreement was concluded.
 Purpose


Reduce financing costs by cutting interest expenses and maximize
shareholders profit.
Gain financial leverage effect
31
Reasons for Refinancing in PPP Project
 In PPP project, refinancing aims to increase expected rate of
return of investment when financing can be done on better
conditions than the first loan agreement for the following
reasons.

When construction risk is removed by completing construction of facilities

When actual level of operating revenue is known

When instability of project is removed by realization of government support.

To enhance financial leverage effect when the initial capital structure was
unfavorable conditions for investor

Changes in macro economic situation
32
Sharing Refinancing Gain in PPP Project
 Why does the government share refinancing gain?


As a major player, the government provides various supports to PPP project,
and it has right to share refinancing gain unless the private partner bears
100% of refinancing risks .
The government’s contributions to PPP project in Korea
 Support and compensation for project site,
 Support for project-related civil complaints
 Financial support during construction period
 Guarantee of certain level of operating revenue for certain period of time
 Operation of SOC Credit Guarantee Fund
 Assurance of recovery of substantial amount of capital expenditure through
termination payment when the project is suspended.
33
Changes in Refinancing System
First period of refinancing
(Before 2004)
Period when there were no specified
refinancing-related provisions in Act on PPP,
its enforcement decree and basic plan
Second period of refinancing
(2004~2007)
Period when refinancing provisions were
included in basic plan of PPP project
(June 2004)
Third period of refinancing
(After 2008)
Period after the revision in 2007 of basic plan
for PPP project and detailed guideline for
refinancing was announced (December 2007).
34
Features : First Period of Refinancing
First period of refinancing(Before 2004)
 Share gain through re-negotiation by projects . There were no
refinancing-related provisions specified in Act on PPP, its
enforcement decree and basic plan

Most projects neither had regulations for refinancing in concession agreement.

Refinancing profit sharing project: through re-negotiation
 New Airport Highway

No-sharing of refinancing gain : Project company owned all refinancing gain.
 First segment of Second Beltway of Gwangju, and Mt. Sujeong Tunnel
35
Features: Second Period of Refinancing
Second period of refinancing (2004~2007)
 Period when refinancing provisions were first included in basic
plan for PPP project (June 2004).

Estimate refinancing gain on loan agreement standpoint ⇒ estimate refinancing
gain comparing ROI of shareholders between loan agreements

Share refinancing gains between government and project company through
negotiations based on estimated refinancing gain

First applied in refinancing for construction project of highway between Cheonan
and Nonsan
36
Features : Third Period of Refinancing
Third period of refinancing (After 2008)
 Sought refinancing gain by applying detailed guideline for
refinancing based on basic plan for PPP project amended in 2007.


Estimate refinancing gain on standpoint of concession agreement ⇒ estimate
refinancing gains by comparing ROI of concession agreements.
Share Refinancing gain through negotiation between competent government
authority and project company after prior examination of refinancing gain by
PIMAC
 Expressway between Daegu and Busan, Gangnam Beltway, and multi-purpose
terminal at new outer port of Mokpo (1-1 phase)
37
What is refinancing in Korean PPP system?


Acts of maximizing expected return of investors by changing capital
structure, investor stake holdings and loan conditions, compared to the
first loan agreement
The first loan agreement means financing terms of the concession
agreement.
 Examples -- acts of refinancing


Change in investor stake holdings by over 5%
Changes in capital structure, such as reduction or increase of equity and
subordinated debt or senior debt
38
What is refinancing - continued
 Examples -- acts of refinancing

When changing capital structure, project company should maintain
minimum equity ratio (over 25% during construction period, and over 10%
during operation period)
 Conspicuous change in loan conditions(interest rate, repayment period, and
terms on debt service reserve account)
ex) Reduction in financing cost by applying low interest rates
Early realization of shareholders ’gain by extending repayment period
Early realization of shareholders ’gain by easing limitation on payment of
dividends
39
Sharing refinancing gain

Sharing refinancing gain is applied to the increased portion of expected rate of
return by refinancing
 Expected rate of return is estimated based on blended ROE concept

Subjects are projects with total cost of over 50 billion won
 Even though their total costs are less than 50 billion won, such projects are excluded as
appropriateness of refinancing is recognized by competent authority and profit-sharing is
specified in concession agreement

Profit-sharing of refinancing is not applied to PPP projects that receive neither
financial support, MRG nor compensation on termination
40
Measurement of Refinancing Gain

Refinancing gain is measured as the increased portion of ROE of calculated by
the ‘comparative financial model’ versus ROE calculated by the ‘pre-refinancing
model’
Base financial
model
Pre-refinancing
model
The financial model of
concession agreement .
Reflect operating
performance
(Reflect it when
changes occur in
agreement )
(Real operating
revenue, operating
costs and estimated
future price index)
ROE 1
ROE 2
Comparative financial
model
Reflect financial market
conditions based on
SPC’s refinancing plan
- Effect of change in
capital structure
- Effect of change in
loan conditions
ROE 3
Share increased portion by 5:5
41
Measurement of Refinancing Gain
 Measurement of effect of changes in capital structure

Effect of interest cost and corporate tax

Effect of early dividend: Effect of early dividend derived from equity sale

WACC effect: Financial leverage effect by financing debt with low
financing costs instead of equity with high financial costs
42
Measurement of Refinancing Gain
 Measurement of effect of changes in capital structure
Capital structure
in concession
agreement
Refinancing
capital structure
Total project
cost
100 billion won
100 billion won
Shareholder’s
equity
25 billion won
(25%)
15 billion won
(15%)
Shareholders’ IRR increases by equity
sale of 10 billion won (Effect of early
dividend)
Debt
75 billion won
(75%)
85 billion won
(85%)
10 billion won of Additional debt 
interest cost increases shareholders’
IRR increases by reducing corporate tax
(Effect of corporate tax)
Example
Effect of change
As equity ratio reduces from 25% to 15%, financial leverage effect is enhanced (WACC effect)
43
Measurement of Refinancing Gain
 Measurement of effect of changes in loan conditions

Effect of changes in interest rate of debt financing
 Effect of changes in interest rates of debt financing by applying financial market
condition.
(Ex.) In case interest rate before refinancing is 12% and market interest rate of
refinancing is 7%, shareholders’ earning is 5%

Measure effect of extended repayment period and eased dividend condition
44
Using Shared Refinancing Gain

Refinancing gain can be used for reducing user fee, reduction of MRG,
shortening concession period, and receipt in cash.
 When deciding how to use refinancing gain, the impact on government budget and
users’ burden should be sufficiently considered

Competent authority can use government’s refinancing gain for reducing user
fee.
 Projects that receive fees from unspecified users, and that reduction of their user fees
can improve social welfare.

In case reduction of user fee is improper, reduction in the level of minimum
revenue guarantee will be considered.
45
Type I : Change in investors
 Changes of existing investors’ equity
<A SPC>
Consortium A
Shareholders’ equity
25%
<A SPC>
Equity of new investors
10%
Equity of existing investors
15%
Creditors’
group A
Creditors’
group A
Loan 75%
Loan 75%
46
Type I : Change in Investors
 Second period of refinancing: Refinancing gain is not measured
when changing investors
 Third period of refinancing

Type 1: Project with MRG ⇒ Refinancing gains are shared
 Change in investors ⇒ Measure refinancing gains with effect of changing loan
conditions

Type 2: Project with no MRG ⇒ Refinancing gains are not shared
2009 Basic Plans for PPP “4-4. Refinancing” provision
-When equity of investors with over 5% is changed, the company will
be subject of refinancing.
- But, project with no MRG is excluded
47
Type II : Change in Investors and Capital
Structure
 Typical type of change in investors and capital structure:
Expressway between Cheonan and Nonsan
<A SPC>
<A SPC>
Consortium A
Equity 25%
Equity of new
investors(B) 10%
New Subordinated
loan(B) 15%
Creditors’
group A
Creditors’
group A
Loan 75%
Loan 75%
48
Type II : Change in Investors and Capital
Structure
 Third period of refinancing: Share profits based on detailed
guidelines for refinancing as investors and capital structure are
changed

Regardless of availability of MRG ⇒ Share refinancing gain
 Refinancing gain : Share profit by measuring effects of both change in capital structure
and that loan conditions
49
Type III: Change in investors, capital structure, and
loan conditions
 Typical type of change in investors, capital structure, and
terms and conditions for debt financing
<A SPC>
Consortium A
<A SPC>
Equity of investors 10%
Equity 25%
New subordinated loan B
25%
Creditors’
group A
Loan 75%
Creditors’ group B
Loan 65%
50
Type III: Change in investors, capital structure, and
loan conditions
 Share profits based on detailed guideline for refinancing as
changes are made in investors, capital structure ,and loan
conditions

Regardless of availability of MRG ⇒ Share refinancing gain
 Refinancing gain: Share profit by measuring effects of both change in capital structure and
that in loan conditions
51
Typical Features of Refinancing in Korea
 Changes in investors, capital structure, and loan conditions are
made simultaneously
 Change in investors: Existing construction investor ⇒ replace with
financial investor
 It is accompanied by change in capital structure through capital
reduction and subordinated loans (in this case, subordinated loans
are typically offered by shareholders)
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Typical Features of Refinancing in Korea
 New investors promote revised financial agreements that reduce
interest expenses and also relaxes security to aim at early dividends

Intensify the grating of credit for prior liens to obtain the consent of prior creditor
for refinancing
 Refinancing is carried out after completion of construction
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
According to the application of the Detailed Guidelines for Refinancing, the
change of investor is also measured as refinancing
Construction companies try to sell their equity to financial investors
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