Harvard Busniess School - Financing Infrastructure Projects in Cities by Prof John Macomber at GIB...

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Interactive Workshop: Financing Infrastructure Projects in Cities Avoiding Traps and Achieving Sustainability 1 21 May, 2014 André Schneider, Global Infrastructure Basel John Macomber, Harvard Business School

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Presented at the 4th Global Infrastructure Basel Summit 21 & 22 May 2014. Read more at www.gib-foundation.org. Next Summit: 27 & 28 May 2015 in Switzerland

Transcript of Harvard Busniess School - Financing Infrastructure Projects in Cities by Prof John Macomber at GIB...

Page 1: Harvard Busniess School - Financing Infrastructure Projects in Cities by Prof John Macomber at GIB Summit

Interactive Workshop:

Financing Infrastructure Projects in Cities Avoiding Traps and Achieving Sustainability

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21 May, 2014André Schneider, Global Infrastructure BaselJohn Macomber, Harvard Business School

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Working together to explore two important tools for evaluating sustainable infrastructure

Format: Workshop

“Participant Centered Learning”

Tools:1. Value for Money (VfM)2. GIB Assessment

Situations:

1. Confederation Line Light Rail Tunnel, Ottawa, Canada

2. Trans Milenio BRT Avenue Septima, Bogota, Colombia

Agenda:

8:30 Introduction and Expectations

Ottawa Light Rail: Value for Money

Bogota Avenue Septima BRT

GIB Grading

Conclusions and Best Practices

11:00 Adjourn

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1. Familiarity, not mastery

2. Advanced tools (Value for Money, GIB Grading)

3. Projects not truly comparable

4. Information not complete

5. Analysis should be more detailed and better documented

6. Table partners do not know each other…yet

7. Discussion questions are open ended

8. Alternate plenary / table / plenary / table / plenary

9. Expect energy…Expect uncertainty!

10. Launch pad for Summit

We will work together to explore two tools, across two situations, at a high level.

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Ottawa

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The Project:

• Purpose: Relieve traffic, keep Ottawa competitive, reduce carbon

• Challenge:

• Tunnel under a river

• Build an LRT rail system

• Build stations

• Procure rail cars

• Finance construction and ops

• Operate it for decades

• Capital budget: CAN$ 2.1 bn (about € 1.4 bn)

• Process: Highly public, votes, many consultants, “Infrastructure Ontario”

Nancy Schepers’ Decision: PPP or “traditional?”

Elements of the Decision:

• Use Traditional Method?

• Issue bonds (general obligation)

• Design

• Bid

• Build tunnel, track - unit cost basis

• Procure and own rail cars, stations

• Operate (supplement tariffs with subsidy)

• Do some flavor of PPP?

• Design-Build? Lump Sum?

• Finance by proponent (builder)?

• Split tunnel, track, stations, rail cars?

• Long term operations contract with

proponent?

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Steps in VfM Analysis:

1. Define the Reference Project (First Cost & Operating Cost)

2. Calculate Raw Baseline “Comparator” (apples to apples on revenue & risk) – as if the whole PPP scope were being done by public sector.

3. Calculate Competitive Neutrality Adjustments (taxes, rates, fees effects for public v private)

4. Identify material risks [geotech, constr, O&M, revenue]

1. Probability x consequence

2. Retained by public sector? Or transferred to private proponent?

5. Calculate PSC Public Sector Comparator:

1. Baseline + Compet Neutrality + Transferable Risk + Retained Risk

6. Calculate VfM “Value for Money” as the DIFFERENCE between “Public Sector Comparator” and the PPP bid + NPV of retained risks.

Value for Money (VfM) analysis tries to break down the risk-adjusted components of value in a PPP proposal

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Illustration of material (major) risks as probability x consequence

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Scope and Budget Comparisons: Ottawa LRT

ItemTraditional Public Sector (This deal “public sector comparator”)

This deal:PPP Proponent Finance, Design, Build, Operate, Maintain

Finance the first cost Government issues bonds

Design the system Design Firm

Build the system Construction Firm

Accept Geotech Risk Owner (Government)

Operate the System (30 years+) Owner (Government)

Maintain the System (30 years+) Owner (Government)

Accept Op Cost Risk (30 years+) Owner (Government)

Accept Revenue Risk (30 years+) Owner (Government)

Projected First Cost Paid to Proponent

1.7 bn

NPV Project Cash Flows 30+ years

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Scope and Budget Comparisons: Ottawa LRT

ItemTraditional Public Sector (This deal “public sector comparator”)

This deal:PPP Proponent Finance, Design, Build, Operate, Maintain

Finance the first cost Government issues bonds Government PLUS private proponent for $300 mm

Design the system Design Firm Private proponent design-build

Build the system Construction Firm Proponent

Accept Geotech Risk Owner (Government) Proponent

Operate the System (30 years+) Owner (Government) Proponent

Maintain the System (30 years+) Owner (Government) Proponent

Accept Op Cost Risk (30 years+) Owner (Government) Proponent

Accept Revenue Risk (30 years+) Owner (Government) Owner (Government)

Projected First Cost Paid to Proponent

1.7 bn 1.8 bn

NPV Project Cash Flows 30+ years

The Big Question: How to Tell if it’s Worth Paying More?

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It’s more upfront money to the proponent. Is there “value for money” for the sponsor?

To Proponent$1718

To Proponent

$1824

PSC ASB

PSC = Public Sector ComparatorASB = PPP & Retained Risk (Adjusted Shadow Bid)

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Left side of room (speaker’s right side):

Consider the table of “scope & budget comparisons” and the “value for money” stacks of costs.

1. What are the major uncertainties and risks in this project?

2. What party should bear which of those risks?

Right side of room (speaker’s left side):

Consider the table of “scope & budget comparisons” and the “value for money” stacks of costs.

1. How else could Nancy Schepers procure this project and its operation?

2. Do Schepers and the Ottawa government realize “Value for Money” if they enter into this PPP as described?

Small group discussions-> Explore at your tables:

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Transmilenio Bogota: Avenue Septima BRT

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The Project:

• Purpose: Relieve traffic, keep Bogota competitive, reduce carbon significantly, help many, many low income workers get to work

• Challenge:

• Take existing traffic lanes

• Take some adjacent real estate

• Build dedicated BRT stations

• Procure buses

• Finance construction and ops

• Operate it for decades

• Capital budget: USD$ 508 mm (about € 370 mm)

• Process: Highly political; one party likes BRT, one party likes Metro, some people like no change at all.

Mayor Luis Eduardo Garzón’s Decision: Build BRT down Avenue Septima in Bogotá?

Elements of the go/no-go Decision:

• Decide based on which political party

in power?

• Get a capital subsidy from

InterAmerican Development Bank?

• Charge fully loaded costs to riders?

• Create an operating subsidy from

other city revenues?

• Get a bigger subsidy for metro

instead?

• Will abutting businesses contribute to

capital and operating costs?

• There is no comparison to

“Infrastructure Ontario” oversight.

• There is no apparent PPP interest

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Guiding Principles for Sustainable Infrastructure

André Schneider

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Plenary Discussion of Confederation Line LRT and Avenue Septima BRT

John Macomber

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Comparing with GIB AssessmentResult Spiders

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Left side of room (speaker’s right side):

Assume you can are an investor and you must invest in one and only one of these projects.

• Based solely on the GIB Assessment as you understand it, in which project would your table group invest?

• Why? What are the three main factors in your decision?

Right side of room (speaker’s left side):

Consider the Ottawa situation, the Bogota situation, VfM, and the GIB assessment.

• What are the three biggest traps in delivering sustainable infrastructure, as experienced by your table group?

• What is the best way to avoid each trap?

Small group discussions-> Explore at your tables:

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Conclusion and Best PracticesJohn Macomber

André Schneider

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Seeking “Value for Money”: Ways to Organize PPP(Source: GDF Suez)

Asset Ownership

Operation & Maintenance

Responsibility

Capital Investment

Commercial Risk

Term

A -Management Contracts

PublicPublic / Private

Public Public3 – 5

year contract

B -Operation and Maintenance Contracts

Public Private Public Public8 – 15

year contract

C -Lease/ Affermage Contracts (i)

Public Private PublicPrivate /

Public8 – 15 year

contract

D -Concession Contracts

Private / Public (ii)

Private PrivatePrivate /Public

20 – 25 year contract

E – Private Utilities

Private Private Private PrivateIndefinite

(License to Operate)

i: Leases and affermage contracts are generally public-private sector arrangements under which the private operator is responsible for operating and maintaining the utility, but not for financing the initial investment.

ii: In concession contracts, the new works funded by the private operator are amortized in the accounts of the operator; but the works return to the Public Authority after the term of the contract.

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Insights and Best Practises

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• Sustainable lifestyles can only be developed if the infrastructure makes choices available that support these objectives.

• But confronting these challenges of climate change mitigation and adaptation, resource scarcity and energy

security will require massive investment in the fundamental reconfiguration of the infrastructure that supports modern society.

• This implies that every infrastructure that will be developed has to comply with sustainability characteristics and this for all aspects of sustainability: social, environment, and economic.

• Our experience shows clearly that not achieving such compliance will result in important risks for infrastructure projects, like costs for non-compliance, delays in project implementation or use of infrastructure, difficulty to assure project financing, and finally discontinuation of the project.

• During the conference, we will deepen many of the mentioned topics, like:– sustainable transportation, today at 14:00;– increasing credit worthiness, today at 16:00;– sustainable infrastructure as an asset class, tomorrow at 9:00;– sustainability grading, tomorrow at 11:00;– sustainable credit rating, tomorrow at 13:00.

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Thank you!

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