Preliminary Information Memorandum – Early Market Sounding for the Proposed Availability PPP Road Project: Salatiga - Solo

9 June 2016, Jakarta

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Agenda

1) Purpose of this Preliminary/Early Market Sounding Meeting

2) Availability PPPs (AP) used to Deliver Major Roads

3) Key features of AP Contracts

4) Regulations for AP Projects

5) Opportunity: Proposed Pilot AP Road Project

6) Key Project Features

7) Proposed Risk Allocation Matrix

8) Proposed Commercial Structure

9) General Outline of AP Payment Mechanism

10) Market Sounding Questions

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• Information received from this early market sounding exercise will be used by the GOI to inform the development of a pilot AP road project

• In this context, this PIM does not purport to be all-inclusive or to contain all of the information that a prospective participant may consider material or desirable in making its decision to participate in the tender

• Also, this is not the formal commencement of a bidding process

• This is a high-level presentation…technical detail will be covered later when formal bidding documents are released

Purpose of this preliminary/early market sounding meeting

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Availability PPP used for delivering major roads

• Canada, United States, Australia, New Zealand, Spain, Portugal, and the United Kingdom use APs to deliver road projects

• The real benefit is emphasizing whole-of-life approach to road delivery, maintenance and performance

• 25 to 30 year concessions, involving design, build, finance, operate & maintain

• Government makes annual payments….private sector agrees to meet specific performance standards

Canada: South Frazer Perimeter Road

Australia: Peninsula Link Road

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Key Features of AP model versus conventional procurement

Capital cost

estimateDelay

Cost overrun

Maintenance and renewal cost estimate

Cost overrun

Design & Construct

Operating

Pa

ym

en

ts

Conventional

• Payment only starts when project commissioned – constructor and rest of PPP consortium bear construction risk

• Contractor and O&M partners work at the same time, allowing integration of whole of life efficiencies

• Contractor and O&M partners have equity at risk for term of concession – all parties incentivised to perform and take a “long-term” view

• Lenders focus on quality construction to minimise potential downstream loss due to poor performance of an asset

• PPP Consortium responsible for handing over the asset in a fit-for-purpose condition

• Constructor receives payments during construction

• Contractor and O&M partners work at different phases

• Contractor and O&M partners do not have equity at risk

• Inputs-focus, mainly construction phase

• In traditional delivery, contractor not responsible for residual life of asset

No payment until the project is

delivered according to public sector specifications

Availability-based payments

Performance-based payments

Availability PPP

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The regulations provide that an AP contract shallat minimum include:

Regulations for AP Projects

• an objective and measurable specification andperformance indicators;

• a formula for the calculation of availabilitypayments;

• an effective monitoring system on theperformance indicators; and

• for the payment from the government to thebusiness entity to be initiated upon theinfrastructure having been built and beingready for operation.

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• The GOI is proposing that the planned expressway roadbetween Salatiga – Solo (approximately 32 kilometres) bedelivered as an Availability PPP project by DGH, through BPJT

Opportunity: Proposed Pilot AP Road Project

• This Salatiga – Solo segment forms part of the proposed 72 kilometre Semarang to Solo national road project

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Key projects features of the proposed Salatiga-Solo AP Project

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Proposed Risk Allocation Matrix: Pilot AP Road Project

Risk Allocation

GOI Private Shared

Design Risk

Construction Risk

Commissioning Risk

Land Acquisition Risk

Site Risk

Demand Risk

Availability & Performance

Risk

Operating Risk

Financing Risk

Default & Termination Risk

Residual Value/Handback

Risk

Legislative Risk

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Proposed Commercial Structure

Availability payments will be

made from the GCA

(represented by BPJT) to the

Availability PPP

concessionaire. Deductions

will be made for non-

performance.

The GOI, through IIGF, will

provide a guarantee regarding

the payment by the GCA of

availability payments to the

Availability PPP concessionaire

(i.e. project company).

The project company will ensure

there is a minimum debt to

equity structure consistent with

Availability PPP contracts (most

likely 90/10).

The GOI may

implement a

separate tolling

agreement for

the collection of

tolls.

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Project Status

• The pilot AP road project is currently at the PPP Preparation Stage

• An OBC is in progress, with view to seeking approval by the 3rd Qtr 2016

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Availability Payments - General Outline

•Availability Payments by the Government to the Project Company commence after the infrastructure has been built and ready for operation

• Service Availability Payments in AP Agreements are usually:

- made in quarterly instalments (i.e. “Quarterly Service Payments”);

- indexed for inflation; and

- have a high-level Payment Mechanism formula linking payments to (i) service availability and (ii) performance.

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Availability Payments - General Structure & Mechanism

• In a typical road AP project, the service standards (or KPIs) in the payment mechanism are broadly structured around:

- lane availability;

- traffic volume/usage (i.e. cars, light commercial, and heavy commercial);

- road safety;

- O&M detection, response time and rectification;

- asset maintenance and refurbishment.

- traffic monitoring and communication systems; and

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Service Availability Payment Mechanism –example of high level payment formula

• The exact detail of the payment mechanism is yet to developed, but using recent AP road projects the high-level payment formula for calculating Quarterly Service Payments is expected to be similar to the following example

Quarterly Service Payment (QSPq) = BQSPq– UAq– PAq

where:

BQSPq = Base Quarterly Service Payment for the relevant Quarter;

UAq = Unavailability Abatements for the relevant Quarter; and

PAq = Performance Abatements for the relevant Quarter.

• Note in the above example: - The “Base Quarterly Service Payment” is a separate formula detailing

capital cost, O&M, lifecycle cost, etc; and- “Abatements” usually means reductions in service payments due to

lane unavailability or not meeting KPI/performance service standards.

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Market Sounding Questions

•A Preliminary Information Memorandum is available which outlines the project opportunity, and seeks market feedback on key questions

• Your answers to these questions will help inform the development of the OBC and AP procurement process

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Market Sounding Questions – Key Questions

• Is the project considered an attractive opportunity from your perspective?

•Are there any factors that would influence your decision to participate in the proposed project?

•Are there opportunities or concerns surrounding your membership in a project consortium?

•What is a realistic time frame for the proposed project?

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Market Sounding Questions – Key Questions for Construction Members of an AP Consortium

•What types of challenges and risks do you foresee during the construction period of this project?

•Do you perceive any constraints/limitations for participation by construction contractors? If so, how could these be solved?

•Are there any specific conditions that the GOI should consider prior to the project being tendered out?

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Market Sounding Questions – Key Questions for Finance Members of an AP Consortium

•What key factors will drive your interest for extending funding assistance to this proposed pilot AP road project?

•What is your likely financing approach for this project?

•How would you manage foreign exchange risk?

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Market Sounding Questions – Key Questions for O&M Members of an AP Consortium

•What types of challenges and risks do you foresee during the operating period of this project?

•What is your preference in terms of length of time for the operating term?

•Would you be comfortable with a contract structure that allows for both the GOI and the AP consortium to conduct 5-year benchmarking reviews with regard to services, costs, and impact on the annual service payment?

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Market Sounding Questions – Key Questions for Advisors to an AP Consortium

•Do you feel that there is sufficient capacity and capability in the advisory market to support consortiums to bid and implement a pilot AP project? What are your suggestions about solutions?

•What role do you think international advisors could play in assisting capacity building of local members in an AP project?

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Thank you…and Questions