TWN CONFERENCE WASHINGTON DC PUBLIC PRIVATE PARTNERSHIPS Welcome to everybody. As I am saying on a regular basis these days our commitment to communication is real and it is an opportunity to share information formally and informally. It is also a great opportunity for us to learn and for you you to ask questions. So if you would like to ask questions please do so, or if you have any feedback please feel free to provide it during the presentation or later if you choose. Today is also an opportunity for Jane and I to share some of the key learning from our recent study trip to the USA where we met with some very high profile people, representing organisations with massive scale and complexity. We weren’t sure what to expect but I think it’s fair to say we were both impressed and excited in what we learned. Impressed in the sense of what people were doing , but also excited that we believe we are on the right track and in some cases ahead of the game. We would now like to share some of our learning with you So to today’s agenda N o r m a n J o h n s t o n 9 May 2005

A G E N D A A G E N D A Introduction to PPPs Government and Financing Financing PPPs Typical PPP Structure

Introduction to PPPs A Public Private Partnership is a long-term partnership between the public and private sectors for the purposes of delivering an asset and/or a service The PPP objective is to allocate responsibilities and risks to the partners who are best able to manage and mitigate those risks, thereby offering better value for money and quality of service than traditional public sector procurement methods Is a ‘win-win’ situation for both the public and private sectors

Key Features of a PPP Risk transfer from the public sector to the private sector (or any other party more suited to the risk) Output-based specification Long-term concession periods Performance measurement Incentives and penalties Competition Utilisation of private sector management skills

PPPs offer advantages over the traditional procurement method PPP Benefits PPPs offer advantages over the traditional procurement method Optimal transfer of risk and responsibility to the private sector Lowers the cost of the project to the public sector Encourages the private sector to be efficient Accountability and on-time delivery Concentration by the public sector on core competencies Flexibility in structuring and delivery Improved forecasting and budgetary requirements by the public sector Reduced public sector capital outlay Conversion of capital expenditure to annual payments gives intergenerational equity The government can maintain control through regulation/management

PPPs offer additional indirect benefits PPP Benefits PPPs offer additional indirect benefits Increased foreign investment Increased local investment Deepening of the banking market Transfer of ‘best practice’ in infrastructure The provision of services more rapidly than would otherwise be possible The excess capital allows for the provision of additional services or infrastructure projects

Models used for Infrastructure Delivery Government Private Sector Asset Ownership Operating Risk Residual Value Risk Examples Delivery Method 1 Government Provision Libraries Community Centres Energy assets Airports Ports 2 Privatisation 3 BOOT Toll Roads Water and waste water assets Prisons and hospitals Sporting facilities 4 Serviced Infrastructure Model Courts Special purpose accommodation

Models used for Infrastructure Delivery RISK TRANSFER Risk and Government involvement PPPs High Low GOVERNMENT INVOLVEMENT Privatisation BOOT Serviced Infrastructure Model Government Provision

Typical PPP Structure Government Department Independent Reviewing Body Private Sector Company Debt Financier Private Sector Consortium Operator Construction Contractor Concession Agreement Capital Project Services Equity Finance Independent Reviewing Body

The Debate on Financing … and have had many delivery failures Governments are running out of money…. General Government Outlays on Investments 2 4 6 8 10 12 14 16 18 1970 1980 1990 1997 % of General Government Outlays United States United Kingdom Germany Canada Australia 2000

Global Trends in Privatisation Over the last few decades, there has been a slow trend towards private financing of infrastructure projects Generally, the first projects delivered using PPPs are the most clear cut in terms of: Allocation of roles and risks Simplicity of financing structures Privatisation of independent, non-core, government-owned infrastructure businesses; then Private sector delivery of individual infrastructure projects through BOOT-type structures; then Expansion to include social infrastructure projects – private ownership with public service delivery, etc

History of PPPs in Australia Tollroads Hospitals Water Prisons Power Sea Ports Airports Rail Defence Toll Roads Schools Pre 1990s - 1993 1994 - 1997 1998 - 2000 2001-2002

How are PPPs Financed? Projects financed individually Project companies funded by non-recourse debt and equity 70-90% gearing Restrictive covenants common, for example: 6 month debt service reserve and capex reserve BCR: 1.2 - 1.5 times + No further senior debt borrowings allowed Strong credit ratings possible due to long-term contracts and secure cash flows

Range of Financing Options Public listing Infrastructure Funds Financial Institutions Unlisted Funds Operators and Constructors Equity Banks Capital Markets Private Placement Sub-ordinated debt Lease-based Finance Debt Australian financial markets sophisticated for Infrastructure projects

Bank Debt Traditional primary source of project debt funding Flexible repayment schedules (compared to Capital Markets) Historically reluctant to exceed 80% gearing or 15 - 20 year terms Competition from Capital Markets and international banks have seen banks offer more competitive terms Up to 90% gearing 25+ year term Margins – 75-250 basis points Terms of debt depend on quality of project cash flows

Capital Markets Debt Increasingly used to fund large infrastructure projects Bond structure chosen to best match project cash flows Wide variety of capital market debt instruments including Corporate Bonds Infrastructure Debt Inflation Indexed Bonds (CPI Bonds) Zero Coupon Bonds Commercial Paper and Medium Term Notes Subordinated Debt

Equity Superannuation funds and specialised infrastructure funds Growing demand from this sector (MIG, GIF, etc) May be willing to invest up to 10-20% of project value Generally, require a post-tax IRR of 10-25% depending on the individual characteristics of the project Trade Investors Companies involved in the development or operation of the project Generally, more interested in the development or operational role May accept a lower IRR than institutional investors to win the other roles within the project added familiarity and comfort with the project

Debt Financiers Attracted by the nature of PPP cash flows Good credit Long term Predictable Often CPI linked – attractive to insurance / superannuation funds raising CPI linked bonds Offering increasingly aggressive terms as competition increases and debt providers become more comfortable with the sector Capital Markets offering ‘tailor made’ securities Banks offering longer terms, higher gearing, lower margins

Equity Providers Investment in PPPs well suited for Super/Pension equity funds Long term Low risk- predictable / stable returns Good credit ‘Recession-proof’ Several infrastructure funds or sector-specific funds Many funds publicly listed Macquarie leading the way in Australia, but other following (eg, Plenary/ABN) Accepting more risk / lower returns as market matures

Trade Investors Construction, engineering, operation and maintenance companies May take small equity positions in project companies with which they are involved Generally, more interested in construction / operation role Stable, long-term income stream PPPs represent a significant proportion of large contracts in the market Vital to win large contracts in rationalising markets that are subject to increasing global competition

Government Better ‘Value for Money’ Risk transfer - can be tailored to suit project New technology / innovation Private sector competes on Whole of Life project cost, creating synergies between construction and operation Greater range of finance available to Private Sector Allows Government to ‘steer rather than row’ Encourages foreign investment User pays (eg, toll roads) More equitable recovery of capital costs Encourages commercially viable projects (full cost recovery)

Conclusion PPPs - partnership between the public and private sector using commercial debt Sharing of risk and responsibilities between public and private sector Offers several advantages over traditional procurement methods – government not off the hook Projects financed individually with a mix of debt and equity - government streams its cash flow

Department of Commerce THANK YOU Norm Johnston Group General Manager State Property NSW Department of Commerce 2-24 Rawson Place Sydney NSW 2000 Australia Phone: +61 2 9372 8695 Fax: +61 2 9372 8675