Public Private Partnerships in the United Kingdom & Portugal Ashley Blows Tel: 44 (0) September 2003

Background to PFI / PPP “The provision by the private sector of a capital asset-based service to the public sector in return for an ongoing performance-based fee”. The difference from conventional BOT schemes is the extent to which PFI schemes are in sectors that hitherto have been the exclusive preserve of the public sector. In the UK at least, the terms PPP and PFI are broadly synonymous. PFI announced by Conservative Government in November 1993, with the first project - a prison scheme - achieving financial close in PFI endorsed by the Labour Party prior to and after its General Election victory in May 1997.

The Government’s Rationale Reap the proven benefits of the BOT model including, principally, the whole life cost savings associated with single point responsibility for delivery of the relevant asset and subsequent service. A mechanism for “imposing” more efficient working practices on a public sector workforce that is conservative and resistant to change. Clear evidence of Value for Money gained across various sectors. Whole life cost savings of between 5% and 15% generated on initial prison, hospital and road projects. Minimising the impact on the Public Sector Borrowing Requirement. Nevertheless, 60% of PFI projects by value are ON the public sector’s balance sheet. PFI procurement also only represents some 15% of total Government capital expenditure.

The UK PFI Market Over 400 projects have closed since 1995 with an aggregate capital value of some £28 billion. Projects with an aggregate capital value of a further £20 billion are currently in procurement. The Government expects to close projects with an aggregate capital value of approximately £4 billion to £5 billion each year for the foreseeable future. Key sectors - historically - have been Transport (46% of total deals by capital value), Health (12%), Defence (10%) and Education (8%). Going forward, key sectors are Health and Education.

An Example - The Health Sector 40 hospital schemes closed to date with an aggregate capital value of almost £3 billion. 25 hospital projects with an aggregate capital value of some £5 billion are currently in procurement. A further 17 hospital projects with an aggregate capital value of some £2.5 billion are due to commence procurement within the next year. 42 primary healthcare projects currently in procurement with a total capital value of approximately £1 billion.

The UK PFI Market - Key Features A limited number of high value, bespoke schemes (e.g. London Underground and certain projects for the Ministry of Defence). Far larger number of relatively standard projects based on “template” contractual structure prepared by the Government and broadly agreed with key market participants. Mature market for “standard” accommodation schemes such as hospitals, schools, prisons and other Government buildings. Political emphasis is on swift delivery of improvements to key public services. “Standardisation” is central to achieving that aim. Bi-partisan support but still significant opposition from some “Old Labour” MPs and the public sector Trade Unions.

Typical Contractual & Financial Structure Most projects financed in a conventional limited recourse manner. Government encourages this approach due to the rigorous disciplines of due diligence and risk mitigation. Standard contracts assume project finance solution. Funders enjoy a contractual relationship - Direct Agreement - with the conceding authority enabling them to step-in and save a poorly- performing project, whilst ensuring the continued delivery of vital public services. Robust termination compensation arrangements apply if the project is terminated. Low risk nature of projects led to high gearing and long loan tenors. Larger schemes (>£100m) typically funded via the capital markets as a monoline-wrapped bond.

Typical Risk Profile - Accommodation Schemes Relatively low design & construction risk - passed in full to contractor. Relatively low operation & maintenance risks. Building maintenance is “low tech” and the design lives of key components relatively well understood. “Soft services” (catering, cleaning, etc) are also low risk and the key risk - wage inflation - is mitigated through “benchmarking”. Payments to the SPV are typically performance and not demand based. Deductions for poor performance are passed-through to the relevant sub-contractor. Deductions have been very low across the market. Overall risk profile typically in the range BBB to A (i.e. investment grade).

Current Developments Government recently reconfirmed its commitment to PFI. It also confirmed that projects only progressed on Value for Money grounds and that balance sheet considerations were irrelevant. No more “smaller” (sub-£20m) projects to be progressed via PFI due to proportionately higher costs of procurement. Increase in “bundled” / “partnering” schemes to reduce overall time and cost of procurement. Political focus on increasing flexibility of projects to be able to respond to changing public service needs. Flexibility and highly-geared project financed vehicles are not ideal “bed-fellows”.

Dexia’s Market Position One of the Top Ten banks in the PFI market. Only 5 banks closed more deals than us in deals closed as sole or joint lead arranger with 6 more soon to follow. Dexia involved in one form or another in almost 40 projects. The two leading players are The Royal Bank of Scotland & Bank of Scotland. A larger number of organisations occupy a tier below them closing two to three deals p.a. including Dexia, Bank of Ireland, NIB Capital, Barclays, Bayerische Landesbank, DePfa and Lloyds. Our focus is on developing close relationships with key sponsors to create a large pipeline of ongoing business.

Portugal - Some History Good track record of closing privately financed infrastructure schemes including in recent years the Lusoponte Second Tagus Crossing, 7 “SCUT” shadow toll roads worth almost Euro 5 billion and 4 “real” toll roads worth some Euro 2.7 billion. Further “real” toll roads are in procurement. Significant foreign involvement in the energy sector, both thermal and renewable. Significant recent investment in new football stadia financed on a project finance basis for the Euro 2004 European Football Championships. Various water supply & distribution concessions let in recent years.

Portugal - Rationale for PPP Significant “infrastructure deficit” but parallel budget constraints as a result of EU Stability & Growth Pact criteria. Mechanism to improve the quality of domestic public services through the involvement of the private sector, particularly from overseas. Ability to access significant EIB funding / EU structural funds to assist “affordability” of schemes prior to Otherwise, similar objectives to those of the various UK Governments since 1994.

Portugal - The Future Legislation passed in early 2003 establishing the basis on which PPPs will be taken forward (essentially value for money grounds) and the role of the Ministry of Finance in approving each. Health sector is the next major area of activity in Portugal with the launch of a programme for 10 new general hospitals to be procured over the next 3 years. The projects will include the provision of full clinical services and are part of a more general programme of “corporatisation” of the Portuguese secondary healthcare system. Other projects under way or under active consideration in the water, custodial, defence and education sectors. Dexia has been involved in various transportation projects and is actively considering opportunities in the health and water sectors.