Ministry of Economy of Poland and World Bank Seminar on Legal Economic and Implementation Issues in

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Ministry of Economy of Poland and World
BankSeminar on Legal Economic and
Implementation  Issues in PPP ProjectsJune 17
and 18, 2008 Warsaw WHAT CAN WE LEARN FROM
FAILURES?

• The point of view of an investor
• by Olivier Bonnin
• DCEO of AKA Zrt.
• Drivers of Success

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Different kind of failures. Some examples

• You invest in commercial approach, but the tender
  never come (or is cancelled)
  
• You answer to the tender, but you loose
• You answer to the tender, but no contract is ever
  signed
  
• You signed the PPP contract, but no financial
  closing occurs
  
• You close but preconditions for first drawing not
  met
  
• You invest and built, but revenues are not there

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Commercial Approach, No Tender (or no PPP Tender)

• Happened to Bouygues TP in Romania, Poland,
  Albania, Brazil, France, Serbia, China, Macedonia
  etc..
  
• RULE Its always possible.
• MITIGATION
• Spend what is necessary to assess the quality of
  Project, but not more
  
• Select the project not too big, not too small

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You answer the tender, but you loose

• RULE Its always possible, and not avoidable
• HAPPENED IN France, UK, Croatia, Portugal,
  Serbia, Chile etc
  
• MITIGATION
• Do not spend too much money if too many
  candidates.
  
• (3 is better than 4)
• Run away from tenders which cost too much.
• SECOND CONSEQUENCE (FOR GRANTORS)
• Avoid prequalification with too many candidates
• Avoid asking financial closing at tender stage

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You answer the tender, but no contract ever agreed

• HAPPENED IN Serbia, Croatia, Turkey, France,
  China, Australia
  
• RULE not so often, can be due to
• No real political will
• Strong opponents to the project
• No real clear legal background
• No good economical vision from the tenders
  issue
  
• MITIGATION check that the grantors vision is
  reasonable
  
• Avoid tenders that involve too much
  expanses
  
• (too detailed offer)
• SECOND CONSEQUENCE (FOR GRANTORS) Do
  not issue tender if you are not sure of your
  political will
  

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SERBIA

• 1996 Tender for Highway Beograd Hungary
  (200km), launched in 1995.
  
• Bouygues TP studied roughly cash flow stream,
  and very preliminary investment assessment.
  Traffic interesting, investment reasonable (two
  lanes existing) HUGE FRAUD
• After six month, the minister decided on a
  contract with a bank to finance some minimal
  works and collect tolls.
  
• 1995 NIS - Macedonia border (100 km)
• 100kms of heavy works, with little traffic
• Bouygues TP answer the tender, proposing to
  finance the NIS border section with revenues of
  existing Beograd NIS section
  
• No contract was awarded to anybody.

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CROATIA

• 1992 tender for 6 highways
• Two offers were submitted.
• Bouygues got the contract of Istrian motorways
  and negotiations for main Zagreb - Rijeka
  motorways lasted one year, without any result.
  
• At the end, the government decided to create a
  new company to built and operate the missing
  links between Zagreb and Rijeka.
  

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TURKEY

• Izmit bridge
• Tender launched
• Bouygues submitted two tenders one bridge / one
  tunnel
  
• Huge technical costs to assess the feasibility
  under extreme earthquake risk.
  
• No decision made by Turkish government.
• Tender relaunched some years later under a
  different scheme.

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FRANCE

• 1992 Tunnel under Grenoble
• Tender launched
• 3 answers
• Bouygues TP winner
• The city of Grenoble initiated a long lasting
  process of
  
• communication with the citizens and the opponents
  to the project.
  
• After two years, decision was made to do
  nothing.
  
• Huge cost occurred.

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CHINA

• 1999 Port of Qin DAO Container terminal 1km
  quay length and 50 ha storage 200M
  
• Answer given at the request of Qin DAO
  municipality
  
• Long lasting technical fine turning
• No green light from central authority
• 2001 Port of New Castle 1km, 100ha 250 M
• Tender launched
• Two answers, clearly indicating that the
  precondition to success is that the government
  limit extension of Sidney Botany Bay Port.
  (competiting)
• No decision by government. No award.

AUSTRALIA
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You signed the contract, but no financial closing
occured

• HAPPENED IN Bosnia, Marocco
• RULE generally comes from
• Disagreement on risks allocation, or
• Lack of appetite from lenders, or
• Lack of political will
• MITIGATION
• Clarify in your offer
• Check political will
• Test financial market before spending too much
  time and money
  
• FOR GRANTORS
• Avoid launching tenders if no real political
  will
  

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BOSNIA

• Tender launched in 1998 for a motorway between
  Sarajevo and Croatian border towards north
  (..)
  
• Two answers.
• BY TP winner, negotiated and signed the
  contract.
  
• Very few banks interested.
• Try to agree with the government for a phasing
  without success.
  
• Huge pressure from the then acting minister to
  work with not reputable bank.
  
• No agreement. Contract terminated in 2000.

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MAROCCO

• New port of TANGIERS 400M
• Tender launched in 1998.
• Three answers.
• BY TP winner
• Long lasting negotiations for the concession
  contract. Contract agreed in 2000. Memorandum
  signed by the prime minister.
  
• Then the government decided to change the port
  location and to finance it from public funds.

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You reached financial close, but condition
precedent first drawing are not met
RULE ALMOST NEVER HAPPENS (You are suppo
sed to have signed reasonable conditions
precedent) BUT HAPPENED ONCE TO BOUYGUES (Iv
ory Coast- Quasi-war situation)
ASSESS POLITICAL STABILITY FOR GRANTORS Avoi
d wars
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IVORY COAST

• Abidjan 3rd bridge.
• Tender in 1996.
• Two answers, by TP winner.
• Contract signed detailed studies performed.
• Financial closing reached on 19th November 1999
  with a first drawing forecast on 31st of January
  2000.
  
• Preliminary works performed equity injected.
• -26th of December 1999 first coup of a long list
  to follow. No vote on the law necessary to
  sustain the project.
  
• Concession contract still valid. Loan agreements
  terminated.

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You invested and built, but revenues are not there

• VERY FREQUENT SITUTATION (Germany, Jamaica,
  Hungary, Croatia, .)
  
• It will happen to you.
• Everything will depend on
• The robustness of your financial model
• (did you test 20,-25 down scenarios?)
• The real share of risks between private and
  public partners
  
• (limited in time and amount public support)
• BE OPEN . BE PRUDENT.

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GERMANY

• Warnowquerung in Rostock 1 km tunnel.
• Traffic below forecast, partially due to huge
  ramp-up process (1st tolled project in Germany).
  
• Contract still valid. Negotiation of loan
  agreements and of concession length.
  
• Main consequences Investors IRR.

JAMAICA Highway 2000. Government reluctant t
o apply the toll that was in the business plan.
Main consequences Investors IRR.
HUNGARY Obviously M1-M15 is a good example of
project with less revenues than expected but M5
as well, with a different end.
1996 -Opening of M5 traffic below expectations
, due to ramp up, and then war in Serbia.
-AKA has been able to survive, due to a robust
financial arrangement but no dividends was paid
in ten years. -Then AKA refinanced the loan agre
ement, giving comfort for the whole concession
duration, and restate profitability taking into
account a new risk profile (no more construction
risk) and new market conditions.
-Now, toll system has been changed into the
vignette system.
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There could be other types of failures

• Construction cost rise Bouygues TP has no
  experience of it in PPP.
  
• MITIGATION some risky business as some kind of
  tunnels which are highly dependant on geological
  conditions are not fitted with PPPs where most of
  construction risk is borne by the contractor. Run
  away! (or agree on geological risk borne by
  grantor)
• -Macro economical risks (inflation,
  devaluation,)
  
• Financial structure should be robust enough
• -War risk to be borne by states only
• -Change of political majority have a good
  contract. Give the public partner all rights to
  change its mind, but with clear compensation
  rule
• No one PPP is signed with a single Political
  Ruling Party. During a PPPs life you will meet
  dozens of successive ministers.

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CONCLUSION

• We learned a lot from failures, if we take the
  time to analyse.
  
• THE GENERAL RULE IS
• Some time it is better to run away
• All the other times, simple rules have to be
  respected
  
• Progressive commercial expanses
• Robust financial arrangements
• (it is even more important to have run good
  sensibilities than to have good debt/equity or
  debt service cover ratios)
  
• Assess the real political will including
  opposition to the project
  
• Be humble and consider you may have made
  unprecise forecast
  
• The best financial structure is not the one which
  suits the best to the most probable set of
  hypothesis, but the one which resists to all sets
  of hypothesis, even if not so likely to occur.
• The best concession contract is not the one which
  forecasts all possible events (this does not
  exist) but the one which sets the principles to
  solve unexpected problems, with respect to the
  interest of all stakeholders.

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PPPs are a must in the countries where

• There is a lack of transport infrastructure.
• There is a real will to develop it.
• There are budget limitations.
• (THAT IS TO SAY, ALMOST ALL EUROPEAN COUNTRIES.)
• PPP is before all, a way to manage risks
• Financial risks
• Technical risks
• Legal risks
• Political risks
• In a manner that
• A majority of risks are
• Identified
• Limited in extend
• - Mitigated
• Allocated to the party that is the more able to
  cope with it.
  
• There is a clear rule to
• - identify
• - limit
• -mitigate

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PPPs is a matter of experience but unfortunately

• 1. Experience is like toothbrushes
• You dont like to use others ones.
• 2. People like explain you their success
  stories,
  
• they dont like to detail their failures.
• Experience is also made of failures.
• What does not kill me, makes me stronger. (F.
  Nietzsche)