Alternative Financing of Infrastructure in Denmark

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Alternative Financing of Infrastructure in Denmark

Special Session

Aalborg University, Annual Transport Conference, 26 August 2013

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Agenda

• Introduction:

Brian Mogensen, Grontmij A/S

• Presentations by:

− CFO Kaj V. Holm, Sund & Bælt

− Partner Jonathan Beckitt, CMS Cameron McKenna LLP

− Lawyer Frederik Ø. Kristiansen, Bech - Bruun

• Debate:

• Moderator Ute Stemmann, Grontmij A/S

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Discussion

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• Advantages and disadvantages of the finance and contracting models used

− in DK and

− in UK?

• Alternative financing in the public debate: are there lessons to learn for DK?

• Differences between different types of infrastructure projects as to

− choice of financing and

− contracting model?

• Specific obstacles for using a private finance and contracting model in DK?

• Experiences from UK and DK: Typical mistakes and how to avoid them?

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DEPARTMENT HEAD OF TRANSPORT ECONOMICS MR. BRIAN GARDNER MOGENSEN, GRONTMIJ A/S

ALTERNATIVE FINANCING OF INFRASTRUCTURE IN

DENMARK

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Purpose

 The purpose of the session is through presentations and debate to discuss alternative forms of financing of future infrastructure

projects in Denmark

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How do we finance infrastructure today?

• Tax funding

• User charges (Fixed links - Oeresund and Stoerbaelt )

… and use of alternative forms of organising infrastructure projects:

• PPP – (Kliplev-Sønderborg Highway)

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Projects currently investigated within the strategic analyses

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Projects Minimum -

billion DKK

Maximum - billion DKK

Extension of the East Jutland Motorway north of Vejle 7 7

Expansion og Vejlefjordbro 1 2

Extension of the East Jutland Motorway south of Vejle 6 6

Midtjysk motorway eastern 13 18

Midtjysk highway west 10 13

New track Aarhus Galten-Silkeborg 4 4

New connection at the Little Belt 6 12

Bogense-Juelsminde the Hinterland 54 54

Kattegat connection with the hinterland 100 137

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Projects currently investigated within the strategic analyses

Projects Minimum -

Billion DKK

Maximum – Billion DKK

Realization of hourly model Odense and Århus by the Little Belt 12 21

Ring 5 8 10

Ring 4 1 2

Port tunnel 25 40

S-train to Elsinore 2 2

S-train to Roskilde 1 1

Automation of S Trains 3 3

Light rail in Ring 3 4 3

Full development of new metro lines and light rail

50 50

Total 307 386

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And there are even more projects…

For example:

• Fixed HH Link (32 billion DKK)

• Fixed Link between Fyn and Als (ca. 20 billion DKK)

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How should we finance future infrastructure projects?

Welcome to our special session!

Let me introduce our speakers:

- CFO Kaj V. Holm, Øresundsbron

- Partner Jonathan Beckitt, Infrastructure &

Project Finance Group

- Lawyer Frederik Østergaard Kristiansen, Bech-Bruun

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Aalborg Trafikdage 26 August 2013

Alternative Financing of Future Infrastructure

Kaj V. Holm, Finance Director, Sund & Bælt

Sund & Bælt Holding A/S

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Infrastructure Financing in General

4 ”Clean” Models

Public Financing Private Financing Tax Paid Public Procurement PPP-model

User Paid State Guarantee Model Concession-model

Different combinations are seen in the real world

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User Payment / tolling

An obvious way to raise new funds Has some drawbacks:

• Reduces economic benefit of investment due to lower traffic

• Continuing/increasing use of free alternatives.

Uncertain traffic forecasts

• High transaction costs (toll changing)

• Political resistance

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Private Financing

(PPP-/Concession models) Do not raise new funds!

Both public and private financing create commitment to future payment by:

• Tax payers in the case of public procurement and PPP-model

• Users in the case of state guarantee- or concession models Public versus private financing must be evaluated on the basis of economic advantages in each case

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The PPP-model

The model is also known as DBOF (Design, Build, Operate, Finance)

The Danish State

Investors

Lenders Private Project

Company

Contractor (design and build)

Contractors, Operations &

Maintenance

Loans Equity

Availability Payment

Contractual payments

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The Pro’s and Con’s

Efficient tender strategy, life cycle approach to the project etc.

are not unique to PPP

Balance between financing cost and risk transfer is the key question

The balance has to be analysed project by project

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State Guarantee Model is an Alternative

Reaps many of the benefits from both public and private models

• Low financing cost

• Life cycle approach etc.

• Only relevant in user-paid projects

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The State Guarantee Model

The Danish State

Users

Lenders State Owned

Limited Company

Contractor (design and build)

Contractors, Operations &

Maintenance

Loans User payment

Eqiity + state guarantee

Contractual payments

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Comparison of the different ”clean” models

Public

Procurement

State

Guarantee PPP/Concession

Final payers Tax payers Users Tax payers/users Cost on state

budget (EMU debt) Yes No Yes/no

Financing cost Low Low High

(dependent on risk)

Ultimate risk carrier State State

PPP-investor/

Concessionaire/

State?

Organisation Public Private

(though state owned) Private Project control

(toll-levels etc.) State State

PPP-investor/

Concessionaire

(within limits)

Legal structure Simple Simple Complicated

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General Conclusion

User Payment (tolling) creates new funds to infrastructure Private financing (PPP etc.) creates no additional funds

Both instruments have pro’s and con’s and must be analyzed in a specific context (i.e. project by project)

The state guarantee model may in some projects be a better alternative

Combinations of the ”clean” models can be interesting

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Private Finance – UK Transport

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Private Finance – UK Transport

− Risks

− Contract Structures

− High Speed 1

− Tramlink

− M6 Expressway

− Mersey Gateway

− Common themes

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Private Finance - Risks

− Political risk

− Construction risk

− High capital cost

− Demand risk

− Patronage revenues

− Availability of finance

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4

•

DIRECT AGREEMENT SENIOR

DEBT

PROJECT AGREEMENT

JUNIOR DEBT

DIRECT AGREEMENT DIRECT

AGREEMENT

Authority Shareholders

Project Company

Senior Lenders

Sub-Contractors

Private Finance - Contract Structures

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Rail - High Speed 1

− 100km high speed line linking St. Pancras International to the Channel Tunnel

− HS1 procured as a privately financed project - process started in 1993

− Two phases - Section 1 completed in September 2003 and Section 2 completed in July 2007

− Capital cost US$10 billion

− Sale of 30 year concession to Borealis Infrastructure / Ontario

Teachers’ Pension Plan consortium for US$3.3 billion in November 2010

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Light Rail - Tramlink

− Existing Tram System linking areas outside Nottingham to the city centre – NET Line One

− Extension to network with construction of two new lines

− New concession including Net Line One – NET 2

− NET 2 procured through a PFI process

− Tramlink Nottingham consortium awarded 22 year concession

− Capital cost GBP 520M

− Availability charge with revenue sharing

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Road – M6 Expressway

− Connects two junctions of existing M6 motorway north of Birmingham

− Toll road - 27 miles with 6 lanes

− Midland Expressway consortium awarded 53 year concession to build, operate and maintain in 1992

− Construction completed in 2003

− Capital cost GBP 750M

− No concession fee

− Development of service station areas

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New River Crossing - Mersey Gateway

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Mersey Gateway

− New estuarial crossing for the Mersey estuary with capital costs of approximately GBP 450M

− PPP project for the design, construction, operation and maintenance of the bridge and approach roads with journey time payment

mechanism based on maintaining the average speed of traffic

− Separate contract for the free-flow tolling of the bridge and a further bridge in the area with associated obligations relating to collection of minimum toll revenue

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Common themes

− Risk allocation

− Project management

− Flexible contract structure

− Government support

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Contacts

− CMS Cameron McKenna LLP

− Mitre house 160 Aldersgate Street London EC1A 4DD

− Jonathan Beckitt

− Infrastructure and Project Finance Group

− Tel: +44 20 7367 2113

− jonathan.beckitt@cms-cmck.com

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TRAFIKDAGE

AALBORG, DEN 26. AUGUST 2013

Alternativ finansiering af fremtidens infrastruktur

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OPP SOM ALTERNATIV FINANSIERINGSFORM /ORGANISATIONSFORM

Danske erfaringer:

• Efterhånden mange OPP-projekter – solidt erfaringsgrundlag

• Skoler, retsbygninger, kontorlokaler, arkivbygninger, parkeringshuse, plejecenter, svømmehal/leisurecenter

• Kliplev-Sønderborg Motorvejen eneste danske OPP- infrastrukturprojekt – ikke privat finansiering

• Forskellige modeller

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KLIPLEV-SØNDERBORG

Vejdirektoratets evaluering:

• Prisen er umiddelbart bedre end referencecasen, men …

• En større del af ansvar og risiko placeres hos den private part end i andre udbudsformer

• Hurtigere projektgennemførelse

• Entreprenørernes udfordring med at stille garanti i driftsfasen

• Entreprenørernes incitament til at være ansvarlige for kvaliteten ud over det normale fem års mangelansvar

• Fordeling af risici mellem OPP-selskabet og Vejdirektoratet

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Maj 2013

Anders Eldrup og Peter Schütze

ATP, PFA, PKA, SamPension og PensionDanmark

Ernst & Young, Bech-Bruun, Copenhagen Economics og professor Bent Flyvbjerg

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KORT UDDRAG FRA RAPPORTEN

Transportinfrastruktur:

”Transportinfrastruktur (f.eks. tunneler, broer og veje) kan ofte (med-

)finansieres af brugerne, hvorfor det kommercielle potentiale kan indgå som en central del af aktivets anlæg. Således er transportinfrastruktur ofte velegnet som OPP. En lang række internationale erfaringer understøtter dette udsagn.”

Finansieringsomkostninger:

”Vores konklusion er, at såfremt den private partner ikke overtager risici fra det offentlige, vil finansieringsomkostningerne typisk være lidt højere i OPP-

projekter, end hvis staten finansierer eller garanterer lånene. Den i omegnen af 1 % højere finansieringsomkostning udtrykker den illikviditetspræmie, som en privat investor vil kræve for at investere i OPP-projekter sammenlignet med at investere i likvide statsobligationer.”

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KORT UDDRAG FRA RAPPORTEN (FORTSAT)

Behov for professionalisering af den offentlige bygherrerolle baseret på klare vejledninger.

Anbefaler:

at den offentlige bestiller benytter funktionskrav og konkurrencepræget dialog, når det er muligt

at den offentlige bestiller konkurrenceudsætter projektets risici, således at risicienes omkostninger minimeres

at den totale levetidsøkonomi anvendes som udvælgelseskriterium ved offentlige infrastrukturprojekter

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FAST EJENDOM

Frederik Ø. Kristiansen Advokat · Aarhus T +45 72 27 35 51 M +45 25 26 35 51 E fkr@bechbruun.com

KONTAKT

OFFENTLIG VIRKSOMHED

Navn Johan Weihe Partner · København T +45 72 27 34 53 M +45 25 26 34 53 E jhw@bechbruun.com

FAST EJENDOM

Torben Brøgger Partner · Aarhus T +45 72 27 34 66 M +45 25 26 34 66 E tb@bechbruun.com

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