PPP project «Ķekava Bypass» Open daycija_OPENDAY.pdf · Funding of the European Investment Bank...

PPP project «Ķekava Bypass» Open day

July 6th, 2017

PPP project «Kekava Bypass» Open Day© 2017 Deloitte Latvia 2

Agenda

• Project details

• Legal aspects

• Finance aspects

3© 2017 Deloitte Latvia

Project details

Latvian State RoadsMartins Lazdovskis


Why Ķekava Bypass

• National Planning documents:o National Development Plan;o Transportation Development Guidelines 2014 –

2020

• Feasibility Study for Potential PPP Projects in the Road Sector

• Ķekava Bypass project was defined as one of the mostappropriate PPP projects in Latvia, reported to theMinistry of Transport by PricewaterhouseCoopers in2006


• Over the past 15 years the population in project areaincreased several times

• One of the highest traffic intensities in Latvia (AADT exceeding 10,000 to 20,000 per day)

• Current traffic intensity is three times higher than amount this road section was designed for

• A7 is the only 2 lane single carriageway road crossing Riga

Why Ķekava Bypass


Road Traffic: AADT


Part of TEN-T Corridor

Part of the Trans-European Transport Network (TEN-T) Corridor I.

«Ķekava Bypass» project is included in the Final Report (Dec 2014) of the North Sea-Baltic Core Network Corridor Study of the European Commission with objectives to improve cross border connection, increase capacity and removing bottleneck.


Details of the Project

Total length 17,5 km

Construction of the new road

14,4 km

Existing road reconstruction

3,1 km

4-lane road 11,1 km

2-lane road 6,4 km

CAPEX 80-100 m. EUR


Advantages of PPP model and Socio-economic impact

Socio-economic impact

• Savings on value of time (increased average traffic speed)

• Economic benefits for traffic participants (savings on gas consumption, savings on vehicle operating cost)

• Reduction of risks related to road accidents

Advantages of PPP model

• Mutual financial benefits

• Optimal cost-effective risk distribution

• High quality road construction within the desired timeframe

• Innovative management and technologies

• Growth of industry expertise and enterprises


• Declaration of the Government

• Initial decision of the Government from 12 Sept 2014 onpreparation of the project

• Approval of the Government from 13 Oct 2015 forpurchase of land properties for the needs of project

• March 2016 order of the Cabinet of Ministers was issuedabout launching procurement procedure for “E67/A7«Ķekava Bypass» PPP project”

Governmental support and PPP model


Public-private partnership model

PPP model

Type of contract DBFM (design, build, finance and maintain)

Length of contract 23 years (3 + 20)

Type of payment Availability payment

Client The Ministry of Transport

Balance sheet treatment Off-balance from perspective of the Client


Project timeline

Environmental Impact Assessment Approved, Q I, 2017

Further land acquisition In process until Q I, 2019

PPP tender Q IV, 2017

Financial close Q II, 2019


Principles of implementation approach

Capital expenditure

Maintenance

KEY ELEMENT PRINCIPLE

DESIGN In accordance with EU standards.Open to innovative solutions.

CONSTRUCTION

COMPLETION & AVAILABILITY

In accordance with regulatory requirements (for completion certificate) and criteria of availability certificate.

MAINTENANCE Daily maintenance – subject to requirements of the Cabinet of Ministers Regulations for A1 road class.Periodic maintenance – subject to depreciation/technical indicators.

HAND-BACK In accordance with technical parameters.


Funding of the European Investment Bank (EIB)

EIB appraisal mission

The appraisal mission in respect to technical, economic,environmental, procurement, implementation matters have beencompleted in April 2017

The first stage approval is being sought:• The project has been approved by Management Committee• The Board of Directors approval is expected on 18th July 2017• The project is a potential candidate for EFSI and Investment

Committee’s approval in respect of EFSI is expected on 17th

July

Final approval will be sought after the winning bidder isselected and the full due diligence has been made: beforefinancial close

15«Ķekavas apvedceļš» iepirkuma procedūras veikšanas nodrošināšana© 2017 Deloitte Latvia

Legal aspects

Procurement procedure

DeloitteDace Cirule

«Ķekavas apvedceļš» iepirkuma procedūras veikšanas nodrošināšana© 2017 Deloitte Latvia 16

Description Tender procedure with negotiations

Selection of candidates min 30 days

Minimum of invited candidates 3

If only one candidate corresponds Procedure must be discontinued

Initial proposal submission timeframe min 30 days*

Invitation is sent To all corresponding candidates

Content of negotiations procedure

Goal: improvement of the proposal content (except final submissions)Minimum requirements, appraisal criteria are not negotiated

Decision on the winning bidder without negotiations

Possible

* Minimum timeframe can be 10 days, if the mentioned conditions of Cabinet Regulations No 107, 28.02.2017 have been accounted for.

Key facts on procurement procedure


Key facts on procurement procedure

Description Tender procedure with negotiations

Negotiation of the non-essential conditions of the PPP agreement after decision on the winner

Not possible

Harmonizing of procurement procedure documentation with CFLA

Before initiating the procurement procedure

Draft PPP agreement must be added to

Invitation to submit initial proposal (detailed, qualitative draft PPP agreement is elaborated prior to the tender announcement)

Draft PPP agreement during negotiations

• PPP agreement is harmonized with CFLA prior to commencement of the procedure;

• Specifically marked and non-essential parts of the draft PPP agreement can be altered during negotiations


Project timeline


Oct-17

Nov-17

Dec-17

Jan-18

Feb-18

Mar-18

Apr-18

May-18

Jun-18

Jul-18

Aug-18

Sep-18

Oct-18

Nov-18

Dec-18

Procurement timeline

6

Candid

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Negotiations &

develo

pm

ent

of

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0

4

Tender procedure with negotiations

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ffers

Pre

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Fin

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posal

Waitin

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P c

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In

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Evalu

ation o

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Decis

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Fin

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Evalu

ation

6

12

Decis

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10 6 10 44 4 2 WEEK


Required qualifications to participate in procurement process

RANGE REQUIREMENT

ECONOMIC ANDFINANCIAL

• Average turnover from construction works• Requirement for equity capital level

• Ability to finance the project (support letter)• General working capital, liquidity, profitability, solvency

ratio

TECHNICAL ANDPROFESSIONAL

• Experience of construction in similar infrastructure (roads,other transport-related structure):

• Roads of the national significance (freeways,highways, regional)

• Annual average daily traffic volume• Experience of designing road infrastructure (main state

roads or regional roads or equivalent roads abroad)• Long term road maintenance capacity:

• Road type• Term of maintenance• Annual average daily traffic volume

• Capacity of professional staff in the above stated projects


Legal aspects

PPP agreement

DeloitteKathleen De hornois


Lifecycle of the agreement

Conclusion of the Agreement(c. 6 months)

01

Preferred bidder decision

• Preferred bidder decision

02

• Fulfillment of the conditions precedent for the entryinto the force of the Agreement:

- Due Diligence of banks and “green light” for theproject

- Signing of financing agreements

- Submission of list of known subcontractors

- Compliance with insurance obligations

- Issuance of commencement guarantee

• Purchase of Land Necessary for Works / confirmationfrom landowners

•Signing of the information exchange agreement

•Compliance withavailability daterequirements

• AvailabilityCertificate

• Start of availabilitypayment

03

Design / Construction phase(c. 2/3 years)

Financial close / Contract date

Availability date


Lifecycle of the agreement

Availability phase(20 years)

04

Completion date

• Compliance with completion date requirements

• Completion Certificate

• Availability payment in full amount

05

• Compliance with hand back requirements

• Hand back inspections

• Hand back guarantee

• Hand back Certificate

• Compliance with hand back requirements

06

Guarantee period(to be specified)

Hand back End dateAvailability

date


Overview of the draft contract

Main provisions of the contract

Design of the Bypass

✓ Obtaining all permits for design

✓ Designing of the Bypass in line with the instructions of the Public Authority and Permits

Construction of the Bypass

✓ Obtaining all permits for construction

✓ Construction of the Bypass in line with the Design and Permits

Ensuring Availability of the Bypass

✓ Compliance with Availability Requirements

✓ Reinstatement obligation

Ensuring Maintenance of the Bypass

✓ Compliance with Maintenance Requirements

Hand Back of the Bypass

✓ Compliance with Hand Back Requirements

Termination & Step-in rights

Dispute resolution

Subject of the Agreement: DBFM


Finance aspects

Deloitte Andris Liepins


Indicative financing plan

• Envisaged financial structure:

• Project finance type

• D/E ratio: 90/10

• Hedged interest rate risk

• Possible financing sources:

• Shareholder equity/sub-debt (10 %)

• EIB loan (up to 50 % senior debt)

• NIB loan (up to 50% senior debt)

• And/or commercial banks

• At BAFO: uncommitted financing

(up to 90 %)


Cooperation of EIB with other potential lenders

• EIB can finance the lesser of up to 50% of total project costs and 50% of the total senior debt.

• EIB needs to be at least pari-passu with other senior lenders, meaning that the tenor of other lenders may not be shorter than EIB’s, etc.

• Except from being potential co-lenders for long term senior debt, commercial banks have other roles to play: account bank, security agent, intercreditor agent, equity bridge provider (if requested from bidders), etc.

• There are certain credit rating requirements for co-lenders, account banks, security agents, hedging banks, Letters of Credit providers: at the level of A-/BBB+


Indicative structure

Project finance

The Ministry

of Transport

SPV

Prime Contracts

AvailabilityPayments

PPP Contract(DBFM

Agreement)

Debt funding:Commercial Banks,

EIB, NIB, other

Senior Bank Loan

Equity

EPC

Private Shareholders

Maintenance


Requirements for financing plan

Financing plan

The Bidders shall be required to submit:

• Finance Plan (explaining financial structure, financing sources/availability, including their preliminary term sheets/letters);

• Financial model (in Excel format with all formula’s and macro’s used):

• Information also to be reflected in the financial model:

• Rates: IRR; WACC; D/E ratio.• Covenants: DSCR; LLCR; PLCR.• Accounts: DSRA; MMRA.

• Finance plan and financial model to be prepared for the whole project life.

Inputs CapexOpexDebt/sub-debt; equity costsManagement and insurance costsApplicable taxesIndexation

Outputs The Cash flow waterfallThe Statement of CFsThe Income Statement (P&L)The Balance Sheet


General requirementsFinancial model

• Format and presence of supporting documents;

• Supporting documentation substantiating calculations and assumptions and descriptions should be comprehensive and detailed enough so that any competent finance analyst could evaluate logic and correctness of used assumptions without any additional information;

• Financial Model has to be prepared for the entire term of the PPP Agreement;

• Financial Model must include evaluation of all expenses relating to liabilities assumed and taxes payable by the Private Entity.


Key elements

Financial model

• Financial model basis• e.g. Financial model preparation, Dates, Payment term, IRR,

Indexation, WACC, Price assurance, Principles of Availabilitycalculation etc.

• Sensitivity analysis• Requirements for the funding plan and

substantiation of financial capacity• e.g. Evaluation of the need for funding and the planned

structure of capital, Funding terms and conditions (borrowerand own capital), Refinance etc.

• Requirements for substantiation of investments and costs• e.g. Construction costs, Maintenance costs, Admin and

management costs, Risk management costs etc.


Key elements

Financial model

• Requirements for substantiation of revenue, other than the Availability Payment• e.g. Interest, Other revenue.

• Requirements for the financial model, spreadsheet• e.g. Format, Binding terms, Input/Output level of details etc.

• Requirements for the Financial Model User Documentation• e.g. User Manual, Assumption book.


Finance aspects

Deloitte Tadas Jagminas


Payment mechanism

General principles of Availability payment

𝑷𝒏 = 𝑷𝟏𝒏 + 𝑷𝟐𝒏

P1 Non indexed annualpayment related toconstruction cost

▪ Covers:▪ construction costs▪ debt financing costs▪ equity/sub-debt cash flows

P2 Indexed annualpayment related tomaintenance cost

▪ Covers:▪ maintenance costs ▪ major maintenance costs

(periodic investments)

• Spread from availability to contract end date

• Paid periodically and only during availability phase

• Fixed at the time final bid is submitted (certain exceptions exist)


Payment adjustment structureOutput specification

Output specification structure:

• Technical requirements

• Availability requirements

• Performance requirements

Penalty regime is applicable:

• Unavailability deductions (proportional to availability)

• Under-performance deductions (deduction points)

Deductions are not applicable in case of:

• Relief events

• Rectification periods (except failures to meet rectification periods)


Compensation on early terminationCompensation principles for different scenarios

Termination due to Public Entity Fault (or authority voluntary termination)

• The amount of senior debt outstanding at the date of termination

• Sponsors’ equity and sub-debt (including loss of return)

Termination due to Private Partner Default

• Compensation on the basis of an estimated market value of the contract

• Applicable if step-in/re-tendering options fail

Termination without Fault of the Parties (Force majeure)

• The amount of senior debt outstanding at the date of termination

• Sponsors’ equity and sub-debt actually contributed (but not loss of future return)


Indicative risk sharing (list is not exhaustive)Identified main risks and critical aspects

Key risks Private sector Public sector Shared

Obtaining site ownership X

Granting access rights X

Site conditions X

Obtaining permits X

Authority inaction X

Design X

Construction (incl. delays) X

Variations requested by Authority X

Availability of bypass X

Failure to meet quality standards X

Changes in traffic volumes(capped)

X

Legislation changes: general X


Indicative risk sharing (list is not exhaustive)Identified main risks and critical aspects

Key risks Private sector Public sector Shared

Legislation changes: discriminatory

X

Legislation changes: taxes X

Changes in VAT X

General price changes (excl. Indexation)

X

Availability of financing (after financial close)

X

Interest rate risk (after financial close)

X

Environmental damages X

Damage by users (accidents) X

Liability to 3rd parties X

Force Majeure X


Finance aspects

Nordic Investment BankVlilius Girkontas


Financial Institution of the Nordic and Baltic countries

• International Financial Institution of the Nordic and Baltic countries

• Long-term lending in member countries and selected non-member countries

• The Bank complements commercial lending

• Funds acquired on international capital markets

• AAA/Aaa issuer credit rating

• Based in Helsinki

• Founded by the Nordic countries in 1975, the Baltic countries joined in 2005


Based in Northern Europe

Iceland 0.9%Baa3/BBB-

Norway 21.5%Aaa/AAA

Sweden 34.6%Aaa/AAA

Denmark 21.1%Aaa/AAA

Finland 17.7%Aaa/AAA

Estonia 0.9%A1/AA-

Latvia 1.3%Baa2/A-

Lithuania 2.0%Baa1/A-


Long-term lending instruments

• Corporate loans, 5–15 years

• Financing via financial intermediaries, 5–12 years

• Sovereign loans to states or against state guarantee, 15–30 years

• Loans to municipalities, 10–20 years

• PPP financing, 10–30 years


Financing the PPP projects

• Nordic market leader in PPP debt finance

• Experience in transaction structuring & execution

• Long maturities

• Ability to evaluate and price the risk of PPP projects

• Loan amount: EUR 30-100 million.

• however, not more than 50% of the total project cost

• Non-exclusivity


NIB's involvement in PPP procurement process

Pre-qualification phase

Competitive Dialogue / Negotiated procedure

Preferred Bidder, up to Financial

close

NIB's involvement:

- Familiarising with PPP agreement and with the Project

- Discussions with all pre-qualified bidders

- Meeting/-s with Procurement Authority

- Partial due diligence of the Project

- Providing indicative term-sheet

- Full due diligence of the Project

- Changes to PPP contract

- Internal credit approvals

- Committed financing offer

- Signing the Loan documentation (in 3-4 months after the Preferred Bidder announcement)


Key factors in PPP financing

• PPP Agreement must be bankable:

− Risk allocation / Pass-down of risk from SPV to those best able to manage it

− Payment mechanism

− Termination events and Compensation on termination

− Step-in rights (Three party/ Direct agreement)

− Relief events, compensation events

• Experience and credit quality of Contractor and O&M provider

• Availability based projects cannot bear refinancing risk

• Interest rates must be hedged for the whole period of the loan

• Independent advisers assigned on behalf of senior lenders and independent engineer supervision during the investment and maintenance period


Example of financing of the typical availability based PPP project

• Shareholder funds: 10-20%, bank loans: 80-90%

• Shareholder funds invested upfront or pro-rata (however, in this case

additional guarantees, Letters of Credit are needed).

• Base case financial ratios:

− min. DSCR > 1.25-1.30 , etc.

• Loan tenor: concession length minus 2-3 years, however not longer than 25-30 years

• Required reserve accounts:

− Debt service reserve account (DSRA): 6 months

− Maintenance reserve account (MRA): 3-4 years forward looking

• Standard PPP Security package, including step-in rights, performance guarantees, etc.

• Due diligence reports by independent advisers: Technical, Legal, Insurance, Model Audit


PPP projects financed by NIB

Sweden Finland Norway Poland Russia

Arlanda express PPP project, 1994

E75 Järvenpää-Lahti road PPP project, 1997

E39 Klett-Bårdshaug road PPP project, 2003

A1 Gdansk-Torun road I phase PPP project, 2005

St. Petersburg waste water PPP project (LCC Nordvod), 2002

New KarolinskaSolna hospital PPP project, 2010

E18 Lohja-Muurla road PPP project, 2005

E39 Lyngdal-Flekkefjord road PPP project, 2004

A1 Gdansk-Torun road II phase PPP project, 2008

St. Petersburg Pulkovo airport PPP project, 2010-2011

E18 Koskenkylä-Kotka road PPP project, 2011

E18 Grimstad-Kristianstad road PPP project, 2006

E18 Hamina-Vaalimaa road PPP project, 2015


E39 Klett-Bårdshaug road PPP financing

• Project cost: EUR 188 million

• NIB's loan amount: EUR 38 million

• Loan tenor: 26 years

• The 22 km road section, of which almost half is tunnels, was completed in only 26 months.

• Norway's first road PPP project.

• Project sponsors: Skanska ID AB (50%), John Laing Infrastructure Ltd (50%). Now the shares are sold to pension funds.

• Availability based payments

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