Transcript FINANCING OF TRANSPORT INFRASTRUCTURE AND CREDIT CRISIS

FINANCING OF TRANSPORT INFRASTRUCTURE POST CREDIT
CRISIS: VIEW OF A PRIVATE DEVELOPER
Enrique Fuentes, Development Director Ferrovial
Chairman PPP Workgroup European International Contractors
Private Sector Forum on the Credit Crisis
European Comission & EPEC
Brussels, October 2009
1
1
1
SUPPLY SIDE: ADVANTAGES OF PPP’s
•
Private involvement brings discipline and rationality to the decision
process
– PPP projects solving actual capacity / demand problems are the most
financially feasible
• Private funding used in projects capable of generating predictable revenue,
government funding focused on pure development projects
• Natural tendency to invest where investment is more needed
•
Deliverability & accountability: Ensures development, upgrading &
maintenance of infrastructure, not subject to budgetary constraints
– Ongoing maintenance and future capex
•
Incentives in PPP’s focused on providing a public service in the most
possible efficient way: deliver the most efficient infrastructure that serves
public needs
– Construction focus on value engineering and early delivery
• Stop to cost and delay overruns
– Focus on Life Cycle costs, rather than initial construction costs
• Optimization of opex / capex balance
• Management of ongoing capex
– Development of new technologies for better service / enhanced
revenue: Free-flow tolling, Congestion / accident detection systems,
Toll plaza queues management, Automatic anti – icing
2
2
2
SUPPLY SIDE: ADVANTAGES OF PPP’s (II)
•
User paid schemes may bring additional advantages
– If cost of service is reflected, they incentivize user to be efficient
– Generate alternate sources of finance for the Government
• In certain markets, more reliable than Government funding
– Contract with a 3rd party allows to avoid political review of tariff
setting
• Where Government retains control of tariffs, they seldom end up reflecting
real cost of service: US turnpikes
•
… and, of course, they are “off Balance Sheet”
– Although in the medium term the problem will be financial, not just
accounting: who pays rather than on whose Balance Sheet it sits
•
Use of PPP’s to fund infrastructure brings advantages more for their
efficiency than for their accounting impact
•
Trade off: Cost, Project IRR (WACC) vs. Cost of Government Debt
– Sensible risk / return balance
– Current environment (restricted access to financing)
3
3
3
DEMAND SIDE: DEBT RAISING STILL DIFFICULT
•
While improving, markets are still restricting access to credit for private sector
– Overall credit to private sector still decreasing
• Demand is also decreasing
– Surge in demand for credit by public sector
• Potential for future “crowding out”
• … though growing public sector activity may create opportunities for PPP’s
Spain
Spain
4
Fuente: Banco de España Boletín Económico Julio – Agosto 2009
4
4
DEMAND SIDE: BOND MARKET IMPROVING, BUT NOT
APPLICABLE TO NEW INFRASTRUCTURE PROJECTS
•
Bond margins have rapidly decreased, but are still above historical average
•
Low interest rates compensate margins (for now)
– but not in longer tenors
• Yield differentials between 10 and 30 yrs 407ETR bonds in historical records
• Reduction in long term interest rates much smaller than in short term
– … which are the ones needed for infrastructure projects
•
Bond financing is a difficult instrument to fund infrastructure deals
– No certainty of funding at time of committed offer
– Disappearance of monoline insurers
– Requires combination with bank bridge financing
5
Source: Merril Lynch: European bond market report, Oct 2009
5
5
DEMAND SIDE: BANK FINANCING STILL LIMITED
•
While easing, still a significant % of banks report tightening of credit criteria
– Problem mainly risk outlook, no longer on funding
– Close to 60% report increase in margins in riskier loans (i.e.: project
finance), more than 20% decrease in size, close to 30% decrease in
maturities
•
•
Recent activity shows averse view of larger loans and longer tenors
Outlook: Bank financing for projects likely to be limited
– Disintermediation (i.e.: bonds) will grow
challenges for financing
projects
• In the absence of monolines, requirement of bridge financing
• Higher financing risk, higher equity requirement
6
(Source: euro area bank lending survey Q209, ECB July 2009)
6
6
DEMAND SIDE: EQUITY LOOKS ABUNDANT BUT
WITH CONDITIONS
•
•
Limitations of traditional developers to maintain the rythm of investment
– Access to debt
– Equity markets still difficult for raising capital
Increasing importance of pure financial investors
– Infrastructure funds: “dry powder” in existing funds: US$ 71,5 Bn
• … of which US$ 21,4 Bn are allocated to European assets
•
– Increasing interest from final investors (Pension Funds, Sovereign
Funds, Family Offices) in investing directly in assets
Financial investors have specific issues regarding risks and return
– Averse to construction and significant operating risk
• Brownfields preferred to greenfields
• Association with traditional developers to mitigate those risks
– Significant equity IRR requirements (above 12% for mature projects)
– Require not only IRR but also cash yield
• Limitations on debt capacity
• Higher project IRR’s
– In many cases, limitation on maturity
• Most infrastructure funds have tenors of no more than 15 yrs
– Require absolute transparency and predictable regulatory frameworks
• … and are in a position to compare internationally
•
Potential development of a secondary market in which projects promoted
by traditional developers are sold, when mature, to financial investors
7
7
7
DEMAND SIDE: IMPACT ON PROJECT COST
•
Equity: Implicit market IRR’s for listed highway concessionaires at 12% 15%
•
Impact of leverage, cost of debt and ROE on Project IRR
Happy old days
60% leverage
Margin 250bps
ROE+250 bps
Cost of Debt
5%
5%
6,5 %
6,5%
% Leverage
75 %
60 %
60 %
60%
ROE
10%
10 %
10 %
11,5 %
After tax project
IRR
6,25%
8%
8,6%
9,5%
Diff with Govt Debt
2,25 pts
4 pts
4,6 pts
5,5 pts
In current market environment, financial appeal of PPP’s decreases significantly
•
… however, other positive elements remain or are reinforced
– Efficient resource allocation
– Pressure on Government spending
– Efficiency
8
8
8
ADAPTING PPP’S TO NEW REALITY: SHORT TERM
•
Bidding process
– Certainty of financing no longer exists
• Avoid long post preferred bidder phases (obtain approvals before)
• If not possible, introduce flexibility to re-adjust conditions
– Easier to fund smaller projects: reduce investment and risk
•
State or supranational to provide guarantees for the issuance of debt
– For amounts consistent with investment grade ratings
• Underlying risk linked to predictable cash flows, not collaterals
– Would give certainty on amount & cost of debt
• Recent state guaranteed issuances by Spanish banks placed at swap + 7080 bps
– Could charge a premium (lower than the differential with private debt)
• Would not only save the interest, but generate a revenue
– May be cancelled once market allows issuance of competitive private
debt
– Direct guarantee preferred to indirect (i.e.: minimum traffic) or partial
coverage of specific risks
• Indirect guarantee likely to be penalized by market
• Partial risk and amount coverage forces to create a 2nd lien unsecured layer
of debt which would be much more expensive
9
9
9
ADAPTING PPP’S TO NEW REALITY: LONG TERM
•
PPP’s should be true partnerships, not Privately Funded Government
Projects
– Reasons for PPP’s should not be budgetary constraints, but efficiency
– Private Party should be given flexibility, under clear legal framework
based on performance indicators, to run the project efficiently
• Management of initial investment
• Management of ongoing Opex
•
Adapt projects to bond markets and international financial investors
standards
– Transparent regulation and consistent behavior of granting authority
• Change orders
• Delays in payments
– Regulation should facilitate financing
• Facilitate creation of guarantees
• Facilitate step in rights
• Facilitate change in ownership
•
•
Taxation regulation: need to provide municipalities with reliable and
accountable tax revenues
Increasing attractiveness of user paid schemes
– May allow for efficient pricing of the public service
– Create alternative to traditional taxation
– With mounting Government deficit issues, user paid schemes may end
up being more attractive financially
10
10
10
PPP FORMULAS: LIKELY EVOLUTION
•
Short / Medium term
– Surge of PFI schemes for “off balance sheet” reasons
• Trend likely to be discontinued while funding cost differentials between
public & private risks are as high as today
– Minimum risk transfer & minimum cost
– Limitation of concessionaire upside
– Initially developed by contractors, later sale to financial investors
•
PFI main limitation: government future payment commitments
– Budgetary constraint: today is accounting, tomorrow will be financial
•
Key risk transfer trade off in the long term: efficiency vs cost
•
Long Term
– Classic user paid concessions for low – medium risk projects
• Funds raised or saved are then devoted to higher risk projects
– Possible transformation of PFI’s in user paid schemes
– Driver for PFI’s: efficiency of private sector
• Likely bias towards projects with a significant recurrent cost component
11
11
11
IS PPP A PROVEN MODEL TO FUND TRANSPORT
INFRASTRUCTURE? ABSOLUTELY
•
12
Aggregate
cumulative
gross
investment
in
transportation
PPP’s of the world’s largest
developers: US$ 242,5 Bn
12
12