Slide1: M6 Motorway PPP Project, Hungary: A Case Study David Asteraki, ING Bank NV IFSL PPP Seminar, Athens 26th May 2005


PPP Road ProjectsA great international success: PPP Road Projects A great international success Widely used across Europe, North America, Asia, Australia, South Africa, etc. Numerous studies have demonstrated value for money There is keen interest from: Construction contractors Operators Financial investors Debt financiers (banks, bond investors, bond insurers) Procurement can be quick and efficient


M6 Motorway Procurement TimetableAn international record: M6 Motorway Procurement Timetable An international record M6 Motorway, Hungary Based on availability payments 1st stage tender (pre-qualification) launched 31 January 2004 2nd stage tenders (3) submitted 19 July 2004 Project Contract signed 2 October 2004 Financial Close 15 December 2004 10½ months in total ING advised Hungarian Government M8 Fermoy Bypass, Ireland Based on mix of real tolls and construction & operating grants Pre-qualification launched June 2002 Initial tenders (4) submitted November 2002 BaFOs (2) submitted December 2003 Project Contract signed and Financial Close June 2004 2 years in total ING arranged and provided debt finance


M6 Motorway Project, Hungary: M6 Motorway Project, Hungary Awarded by National Motorway Company on behalf of Ministry of Economy and Transport Awarded to consortium of Bilfinger Berger, Porr & Swietelsky Final design, construction, financing, operation and maintenance of motorway over 22 years 58 km of dual two-lane motorway, 10 junctions, 54 bridges between Érdi tető (SW of Budapest) and M8 at Dunaújváros Includes some works to local roads Total Project value approximately €480 million €411 million of debt finance with tenor of 20.5 years


Hungary: Planned Motorway Network to 2015M6 forms key part: Hungary: Planned Motorway Network to 2015 M6 forms key part


M6 Motorway Project: A Great Success: M6 Motorway Project: A Great Success Procured in record time Construction timetable meets Government objectives Good risk transfer to private sector 4 strong international consortia submitted 1st stage bids 3 strong 2nd stage bids received Government’s risk allocation broadly maintained Good Value for Money Construction, O&M and finance costs all competitive


Why was the M6 Project such a success?: Why was the M6 Project such a success? Strong political support and commitment Supportive public sector decision making process Sensible approach to market Standard risk allocation Standard Project Contract and Financiers’ Direct Agreement Availability-based payment mechanism No net traffic risk High quality public sector advisors


Strong Political Support and Commitment: Strong Political Support and Commitment Government as a whole committed to PPP projects Strong personal support from Minister of Economy and Transport Istvan Csillag and his deputy Imre Rethy Absence of real tolls paid by motorists reduced political risk Renegotiation of M5 Motorway Project gave good precedent Political imperative to remove real tolls required PPP structure Initial support and commitment made decision making and approval much easier


Effective public sector decision making process: Effective public sector decision making process Negotiating team had: Clear, realistic mandate with delegated decision authority Ready access to ultimate decision makers (Ministers Csillag & Rethy) Strong leader (Fruzsina Biro) with commercial experience Commitment and willingness to work hard! There were no rival decision makers All parties bought into negotiating team’s mandate


Sensible approach to market: Sensible approach to market Announcement in international press Well developed initial information package Project description Initial design Indicative risk matrix Payment mechanism Transparent criteria for selecting tenderers Well developed Invitation to Tender/Negotiate Full draft Project Contract including schedules Transparent criteria for selecting winning tender


Standard risk allocationBased on market standards that have built up over time: Standard risk allocation Based on market standards that have built up over time No significant deviations that favoured the public sector: Minimised delays and legal costs during negotiations Maximised value for money due to familiarity with risk No unmanageable risks Public sector bears risk of approvals, land acquisition, etc. Eurostat rules now favourable to standard PPP projects: Private sector need bear only minimum of construction risk and either demand risk or availability risk for Project to be off balance sheet Key issue is compensation on termination for default Compensation 65% of value of Project to the Government No automatic full repayment of debt


Project Contract and Financiers’ Direct Agreement: Project Contract and Financiers’ Direct Agreement Based on existing precedents (UK OGC Guidance) Familiarity among tenderers and advisors shortened negotiations Risk allocation is more obvious Limited need for new drafting, minimising legal costs UK OGC Guidance is widely accepted English language used, even though under Hungarian law Made project more attractive to international tenderers Eliminated translation costs and time


Availability-based payment mechanismPrivate sector bearing traffic risk reduces value for money: Availability-based payment mechanism Private sector bearing traffic risk reduces value for money Private sector has very limited ability to manage or mitigate However, investors and financiers have been willing to bear it Private sector bearing ANY net traffic risk lengthens procurement period and adds to tender costs Tenderers and their financiers both require detailed analysis Financiers particularly are conservative and require higher margins and cover ratios “Green field” project reduce predictability of traffic volumes Overall, likely to lead to more expensive project


How do availability payments work?: How do availability payments work? Predefined level of gross payments (focus of tender) Payment deductions for unavailability depending on: Length of road affected Number of lanes affected The use of contraflow (on grounds of reduced safety) Duration of unavailability Time of day (higher in peak hours), day of week, season Lanes “unavailable” if not usable or unsafe Periods of maintenance included, to incentivise minimum disruption Exclusions for external events (snow, accidents) Additional deductions for poor performance of services


Strengths and weaknesses of availability payments: Strengths and weaknesses of availability payments No politically difficult real tolls No private sector traffic risk premium Minimises Project cost Procurement period minimised No need to undertake traffic studies BUT Not favoured by EU (prefer “user pays”) High impact on public sector budget


Public sector advisorsFinancial, legal, technical: Public sector advisors Financial, legal, technical Extensive international experience True for team members as well as company Depth of resources Fee rates may be high for quality advisors, BUT their experience leads to: More efficient procurement with likely lower overall cost Better value for money project Using cheap but inexperienced advisors is false economy