European Infrastructure Finance Yearbook - Investing In Bonds ...

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PROJECT FINANCE/PUBLIC-PRIVATE PARTNERSHIPS 130 ■ NOVEMBER 2007 Public And Private Support For Change The active search by the Swedish government together with public entities and private parties for a new model to finance public infrastructure marks a change from the past. Infrastructure Minister Åsa Torstensson has said that the government is looking at alternative financing for infrastructure investments, with the intention of finding ways to achieve PPP solutions. The minister considers that there is a direct connection between new jobs, welfare, and efficient infrastructure. If the government and parliament approve a broad domestic PPP initiative, a concessional framework will have to be developed. A standardized PPP regime with similarities to existing regimes in Europe and elsewhere could attract more potential bidders. Concessions must be designed to provide optimum value, not only financially but also in terms of other targets. Environmental issues have recently become increasingly important in Sweden, as in many other countries. Setting the right goals and requirements from the start is key due to the longterm commitments involved. These considerations have been addressed by the findings of the joint working group, which propose a Swedish PPP model and potential projects. Working Group Scrutinizes PPP Alternative The findings center on the profitability of projects both from a social and economic perspective, transparency of state funding, procurement competition to ensure efficiency and lower costs, and a system that allows for program evaluation. Innovation to introduce more efficient solutions, flexibility, and the potential to start projects at short notice were also identified as key features of a future PPP program. The key findings are: • Quality, safety, and environment. The investment should be of good quality, open to traffic, fulfill safety requirements, and ensure that environmental regulation is met. • Effective risk allocation. The project company should carry construction, operational, and lifecycle risks. The state should be left with risks associated with the use of the asset (for example traffic volume risk) as well as those risks that could be STANDARD & POOR’S EUROPEAN INFRASTRUCTURE FINANCE YEARBOOK better managed by the state (such as acquisition of land, permit processes, pollution, and archeological finds). In the longer term, the working group believes more appropriate risk allocation measures should be developed. • Financing. This should be a combination of a project’s own capital and borrowing to ensure that the sponsors’ incentives are in line with the aim of the project and that they remain committed. • Public financing as a last resort. If the agreements between companies and local/regional authorities fall short, the project should ultimately be financed by the state. • A long-term pipeline. PPP projects should be selected in line with long-term plans in order to control the expansion of infrastructure. Importantly, the working group believes it would be reasonable for the Swedish parliament and government to ultimately decide on the projects to be tendered, as long as taxes continue to finance the asset. • Comparison with public finance. The working group believes that a rule should be established to enable the government to directly compare the cost of a project, to ascertain whether it should be financed via a PPP contract or purely via public funds. • Drilling down. The PPP model should be applicable to smaller projects in the future, once the fixed costs of the bidding process are decreased. Essential Criteria Identified To Facilitate Project Selection In the same report, the working group identified projects it believed suitable for PPP financing. It achieved this by first establishing the criteria a project must fulfill: • Investment volume: The amount invested should be between SEK1 billion and SEK3 billion. • Planning stage: The design plans should be final and must be legally approved. • Profitability: The project’s profitability should measure “nettonuvärdeskvot” (NNK; a ratio that calculates society’s benefit from a project) of at least 0.5x. • Competition: The project should attract
oth national and international interest. • Holistic approach: The project must take due regard of lifecycle costs. • Duration of the contract: Approximately 25 years should be permitted, with no reconstruction in the near future. • Final financing: This should be through cofinancing. Alternatively, user fees could finance all or part of the investment. Pipeline Of Potential PPP Projects The working group identified four projects it believed to fulfill all key criteria (see table 2). The working group subsequently identified projects that could be suitable for PPP, but that do not currently fulfill all essential criteria (see table 3). Similarly, the working group identified railroad projects that should be continually evaluated as to their suitability for PPP financing. These are: Railroad East (Ostlänken); Railroad Norrbotten (Norrbotniabanan); a railroad between Mölnlycke and Rävlanda/Bollebygd; a railroad between Malmö, Staffanstorp, and Dalby (Simrishamnsbanan); and combination terminals and connections to harbors. ■ STANDARD & POOR’S EUROPEAN INFRASTRUCTURE FINANCE YEARBOOK PROJECT FINANCE/PUBLIC-PRIVATE PARTNERSHIPS Table 2 - Prospective Projects That Meet All Criteria For PPP Financing Length (kilometers) Investment (mil. SEK) NNK* (x) Riksväg 50 road between Mjölby and Motala 28 1,330 1.4 E22 motorway between Hurva and Kristianstad 41 (57) 1,100 (1,360) 0.7 E4 Sundsvall South motorway 22 2,500 0.9 Länsväg 259 Södertörn road 9 1,300 0.7 *NNK (nettonuvärdeskvot) measures profitability and needs to be at least 0.5x. SEK--Swedish krona. Table 3 - Prospective Projects That Meet Some Criteria For PPP Financing Length (kilometers) Investment (mil. SEK) NNK* (x) E22 motorway between Kristianstad and Karlshamn 53 1,430 0.5 E22 motorway between Karlshamn and Jämjö 69 (74) 1,840 0.0 E22 Söderköping motorway 17 700 0.7-1.9 E6/45 new connection to river 1.5 2,500 2.2 E20 motorway between Alingsås and Vårgårda 25 1,550 0.5 E4 motorway between Hjulsta and Häggvik 7 4,500 0.2 E4 motorway between Södertälje and Hallunda 15 3,300 N.A. E12 Umeå motorway (Umepaketet) 28 1,100 0.0-2.1 *NNK (nettonuvärdeskvot) measures profitability and needs to be at least 0.5x. SEK--Swedish krona. N.A.--Not available. NOVEMBER 2007 ■ 131
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November 2007 Infrastructure Financ
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CONTENTS Introduction STANDARD & PO
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INTRODUCTION 2007: New Challenges A
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ject Finance Rating Distribution: I
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COMMENTARY Publication Date: Sept.
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UTILITIES EUROPEAN UTILITIES Once a
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UTILITIES approach to ownership unb
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UTILITIES 16 ■ NOVEMBER 2007 tran
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UTILITIES 50 ■ NOVEMBER 2007 stro
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