project financing in public projects
TRANSCRIPT
Project financing in public projects and a case study of a Public-‐Private-‐Partnership project： Chicago Skyway Long-‐term Lease
Project Financing in Public Projects
March. 20. 2014 Xinyi Xue
Master of Project Management Program
Table of Contents
Introduction Conclusion
1Project Financing in Public Construction
Projects
2 3Project Financing Process: Feasibility Analysis and Risk
Control
Case study-‐-‐-‐ Chicago Skyway Long-‐term Operating Lease
Three Questions
• Where does the money come
from?
• How the money is allocated?
• How to ensure that the money is
properly used?
Project Financing in Public Construction Projects
1.1 What is Project Financing? 1.2 Project Financing Process 1.3 Financing Mode for Public Construction Projects 1.4 Public-‐Private-‐Partnership
1
1.1 What is Project Financing
Project finance is defined by the International Project Finance Association (IPFA) as the following (Investopedia’s, 2014) : “The financing of long-‐term infrastructure, industrial projects and public services based upon a non-‐recourse or limited recourse financial structure where project debt and equity used to finance the project are paid back from the cash flow generated by the project.”
Main Characteristics
• Based on projects instead of on the project sponsors. • Debt and Equity are paid back from the cash flow
generated by the project.
• The project debt lenders bear the risks. • Non-‐recourse or limited recourse financing structure.
1.2 Project Financing Process
Conduct Feasibility Study
Syndicate Banks
Prepare Legal Files
Negotiate and Make Changes
Sign Official Paperwork
Project Team
• Project sponsors: lead the project • Advisors: help project sponsors in investment
structures
• Lawyers: prepare legal files, make changes after
negotiation
• Insurer: Help the sponsors to get the proper insurances
for risk management
1.3 Financing Mode for Public Construction Projects (Ren, X.Y., Xu, & Ren, L.B., 2000)
• Tolling Agreement Method
• Production Payment
• Build-‐Operate-‐Transfer
• Public-‐Private-‐Partnership
1.3.1 Tolling Agreement Method
• Between instrument user and service provider
• The user pays no matter they use the instrument
or not.
• Applied in service instruments projects: natural
gas pipeline, power generation facility, and
railway development projects.
1.3.2 Production Payment method
• Lender owns products of the project as
collateral until the debt is paid off
• Applied in oil, gas, minerals development
projects
1.3.3 Build-‐Operate-‐Transfer
• Build by companies
• Operate & Transfer: Operate to get profit, then
return the ownership to the local government
• Applied in public facilities projects: toll-‐way
construction projects
1.4 Public-‐Private-‐Partnership (PPP)
• PPP is a structure that uses private investment to undertake infrastructure
development that has historically been the
preserve of the public sector.
• Popular in projects like a power plant, airport, toll road,
tunnel, bridge, water treatment plant, hospital, school or
government building.
Two Main Characteristics of PPP
• PPP urges government to enhance efficiency in public
instrument construction projects.
• PPP is a way to realize project financing risk re-‐allocation.
PPP is becoming more popular as a way to mitigate risks
for the government (Koppenjan, 2005).
Eight Methods to build PPP(Zhang, 2003)
• Service Contract • Operate and Maintenance Contract
• Lease-‐Build-‐Operate
• Build-‐Transfer-‐Operate
• Build-‐Operate-‐Transfer
• Wraparound Addition
• Buy-‐Build-‐Operate
• Build-‐Own-‐Operate
2 Project Financing Process: Feasibility analysis and Risk control 2.1 Feasibility Analysis 2.2 Risk Recognition in Public Projects 2.3 Risk Management
2.1 Feasibility Analysis
• To come up with investment decisions and
financing decisions:
• Comprehensive Project Report
• Quantitative Analysis
Feasibility Study
Risk Recognition
Quantitative Analysis
Risk Control
2.1.1 Comprehensive Project Report
• The comprehensive project report includes: the need for the project,
the project goal, market projection, resource research (for mining or
gas projects), construction scale and product design, technology
limitation and supportive resources, environmental affects,
investment projection, financing methods, profitability analysis,
social affects, and conclusion (Esty, 2004).
• Those aspects cover all the information necessary for investment
decision-‐making.
Two steps in Financial Feasibility Analysis:
• First, forecast all cash flows: the investment cost of the
project, principle and interest payment for loan.
• Secondly, choose the project that can provide profit based on capital budget.
2.1.2 Financial Feasibility Analysis
2.2 Risk Recognition
• Risks could be system risks or non-‐system risks.
• System risks include Country Risks and Disaster Risks.
• Non-‐system risks include Credit Risks, Completion
Risks, Operating Risks, Market Risks and
Environmental Risks.
Feasibility Study
Risk Recognition
Quantitative Analysis
Risk Control
Milestone of Project Start
Project Construction Phase
• Utilizes most of the loan
• Could be years, depend on scale of project
Project Operations Phase
• The pressure to pay debt is heavier
• Could be years, depends on loan agreement
Different Phases Risks in Public Projects
2.3 Risk Management
o Quantitative Analysis: conduct Quantitative
Analysis to manage financing risks
o Risk Control: develop Risk Control Strategies
along with Feasibility Analysis, Risk
Recognition, and Quantitative Analysis
Feasibility Study
Risk Recognition
Quantitative Analysis
Risk Control
Two ways for quantitative analysis:
• Calculate the Project Return Rate • Conduct Sensitivity Analysis (Zhang, 2003, p. 189-‐204) • Choose an indicator
• Determine uncertainties
• Conduct uni-‐variate or multivariate sensitivity analysis
2.3.1 Quantitative Analysis
2.3.2 Risk Control
Feasibility Study
Risk Recognition
Quantitative Analysis
Risk Control
• Risks control strategies are developed along all the former studies. Examples:
• Forming PPP to reduce Credit Risks
• Insurances, Guarantee
3 Case study-‐-‐-‐ Chicago Skyway Long-‐term Operating Lease 3.1 Background of Chicago Skyway 3.2 Project Sponsors 3.3 Lease 3.4 Feasibility Study and Risk Management 3.5 Benefits of PPP
http://www.youtube.com/watch?v=6oglmRNQ5fA 3:20
Why Chicago Skyway?
• The first time a U.S. toll road has been privatized.
• After the transaction, the credit rate of the City of Chicago was uprated.
3.1 Chicago Skyway Background
• A 7.8-‐mile elevated toll road
• Connecting I-‐94 in Chicago to I-‐90 at the Indiana border • Once an unprofitable enterprise
• In 2004, a $1.83 billion transaction was announced. The
government leased the Skyway to Skyway Concession
Company for 99 years.
3.2 Project Sponsors
Skyway Concession Company
Australian Macquarie
Infrastructure Group
The City of Chicago
Chicago Skyway
Transporte South
America
Form PPP
3.3 Lease
• 99-‐year lease • SCC is responsible for all operating and
maintenance costs of the Skyway but has the
right to all toll and concession revenue.
• The city takes the $1.83 billion cash.
3.4 Feasibility Study and Risk Management
• Macro Risks
• Transporte S.A.’s headquarter is in Spain and MQA is
listed in Australia, they may have Foreign Exchange
Risks, Interest Rate Risks and Inflation Risks.
• They founded SCC as local company to reduce risks.
• Market Risks
• Was not profitable for the government.
• May have an overrun of expense without enough
revenue.
• They manage the market risk by stating in the lease
that they maintain the right to increase the price in
the following decades (SCC, 2010).
Toll changes
Data source: http://www.chicagoskyway.org/tolls/
3.5 Benefits of PPP
• Increases the governments’ efficiency as
well as benefits the private sectors
• The government
• SCC • Local commuters
Conclusion
Where does the money come from?
• Conduct feasibility study to decide if the project is profitable
How the money is allocated?
• Conduct risk recognition and control to design investment structure
and financing mode
How to ensure the money is properly used?
• Reach an agreement and sign the contracts. Apply risk control
strategies, such as founding a local company to manage the project.
The Future of PPP
• It was the first but not the last.
• Nowadays, there are many private toll roads in USA,
such as Foley Beach Expressway in Orange Beach of
Alabama and Poinciana Parkway in central Florida.
• Be Creative!
References City of Chicago. (2010). Public Private Partnerships. Retrieved from http://www.cityofchicago.org/city/en/depts/fin/supp_info/public_private_partnerships.html Chicago’s Department of Street and Sanitation (CDSS). (2010). About Us-‐Mission. Retrieved from https://www.cityofchicago.org/city/en/depts/streets.html International Project Finance Association (IPFA), (n.d.). About Project Finance. Retrieved from http://www.ipfa.org/about/projectfinance/ Koppenjan, J. J., (2005). The Formation of Public-‐Private Partnerships: Lessons from Nine Transport Infrastructure Projects in the Netherlands. Public Administration, 83(1), 135-‐157. Macquarie Atlas Roads (MQA). (2014). About MQA-‐Management. Retrieved from: http://www.macquarie.com/mgl/com/mqa/about-‐mqa Ren, X.Y., Xu, X.F., Ren, L.B. (2000), Social Assessment for Construction Projects, Beijing, PRC: Zhong Hua Gong Shang Lian Press Inc. Samuel, P., (2005, Jun. 29). "Skyway is Interstate-‐90 unless state withdraws reports -‐ Feds". TOLLROADS News. Retrieved from: http://tollroadsnews.com/news/skyway-‐is-‐interstate-‐90-‐unless-‐state-‐withdraws-‐reports-‐-‐-‐feds Skyway Concession Company, LLC. (2005). About the Skyway. Retrieved from http://www.chicagoskyway.org/. Southern Illinoisian’s journalist (2004, Oct. 17) "Chicago privatizes Skyway toll road in $1.8 billion deal". Southern Illinoisian, Carbondale, IL: Associated Press. Retrieved from: http://docs.newsbank.com Transporte South America (2000). About History of Transporte South America. Retrieved from: http://www.cintra.es Zhang, J. (2003). Project Financing, Edition 2, Beijing, PRC: Citic Press Group Inc.
Questions? Thank You!