Wael Elkhouly – Director, Citigroup November 24th 2005, Brussels European Commission The Contributions of the Private Sector to Successful Public Private Partnerships Wael Elkhouly – Director, Citigroup November 24th 2005, Brussels

Introduction Citigroup is pleased to have this opportunity to participate in today’s conference hosted by the European Commission This presentation focuses on the Contributions of the Private Sector to Successful Public Private Partnerships Key Features of PPP/PFI Public Private Partnership (“PPP”) is an umbrella term covering a variety of procurement initiatives, all of which benefit from a close and normally long term relationship with a private sector partner One form of PPP is, as the UK terminology, the Project Finance Initiative (PFI). Under the PFI -The private sector is required to invest in, manage and operate any capital asset(s) necessary to deliver the specified service Payment to the private sector may take different forms, determining how much demand risk is being transferred, e.g.: Based on availability: Payment if service available at the standard defined (e.g. hospitals) Based on demand: Payment proportional to usage (e.g. roads with real tolls) PPPs are in essence a method of procurement of services that: Is more efficient than traditional procurement, i.e. that delivers “value for money” Allows matching of timing of payment and services delivered 1

Benefits for Government Budgetary Management Better Risk Allocation Certainty & Quality of Service Generation of Third Party Revenues Public Private Partnership Timeliness of Delivery Exposure to Private Sector Skills Smoothing of CapEx Spend Profile Optimise Whole- Life Design & Costing Typical conditions for a project to have PPP potential: Requirement for capital investment, either now or in the future Substantial service content within the requirement Scope for innovation in services delivery Competitive market, interested in the public sector’s business, Private sector is better able to manage risks currently taken by the public sector Long term contracts are feasible Boundaries of activity are clearly defined Final decision against key evaluation criteria: PPP offers better Value for Money than the Public Sector Comparator 2

Risk Allocation and Value for Money PUBLIC SECTOR PRIVATE SECTOR Other Approvals Tariffs Policy Service Pattern Construction Risks Right to Build Change in Law Discriminatory Law Force Majeure Title to Land Tax & Inflation Finance Risks Demand Risk Availability Maintenance Risk Operations Risk Operating Interfaces Risks allocated to Public Sector by: Concession Agreement Risks allocated to Private Sector by: Construction Contracts O&M Contracts Residual Risk: Allocate in Competition As a general rule, the public sector body would normally seek to transfer to the private sector those risks where the latter can influence the outcome Precedent from signed projects suggests some risks will normally be borne by the private sector and others by the public sector The remaining risks constitute the negotiable part of the risk allocation, on which the private sector is asked to compete Value for money is a key consideration in deciding whether or not to transfer individual risks 3

UK PFI/PPP Experience: Efficiency - Results to date Evidence suggests the traditional procurement (costed via the Public Sector Comparator) is generally more expensive than PFI / PPP procurement 17% average estimated cost savings against Public Sector Comparators National Audit Office 81% of public bodies involved in PFI projects believe they are achieving satisfactory or better value for money’- National Audit Office 78% of projects have been delivered to price agreed at contract - HM Treasury 88% of projects have been delivered on time or earlier - HM Treasury Only 8% of projects were delayed by more than 2 months - National Audit Office Cost Overruns Timeliness of Delivery: 4 Source: HM Treasury / NAO

PPP in Europe PPP Map Established PPP programme Long history of private concessions in infrastructure (toll roads), emergence of PPPs programmes Recent emergence of PPP programmes Interest in PPPs, isolated experience in private infrastructure The first wave of PPP schemes were implemented in the UK and then began to expand through Europe A number of new EU member countries are showing interest in development of PPP. Poland, Hungary and the Czech Republic as most advanced Historically, the road sector has tended to be the initial application of PPP The pace of development is linked to the regulatory framework and the establishment of a PPP programme PPP Market in Western Europe - Spectrum of Maturity across the region. UK and Portugal being most developed. Transport/ Toll Roads is often a front runner with the earliest projects being shadow toll road schemes in Portugal In Portugal, in addition to roads and Targus bridge: Airports: the new Lisbon airport is expected to be developed as a PPP (c. Euro 2 billion) Hospitals: plans to launch 10 PPP hospitals (Euro 75million/ each) A number of Eastern European countries are undertaking PPP: For instance: Poland: 2 PPP schemes closed in Roads (A2 and A4 – real roll); Czech Republic: Current law only permits PPP in Roads but is expended to be expanded. Government considering Prague ring roads, schools, prisons, and hospitals Outside Europe: Australia: PPP used in Roads, Hospitals and Prisons In Canada, Japan, and South Africa there are limited PPP experience Brazil has established broad frame work for PPP. Brazil’s State and Federal Government propose to attract $65billion of investment in transport (roads, railways and ports) and energy over the next 4 years with a significant portion coming from PPP 5

PPP in New EU Member States Sovereign debt constraints may mean that new EU members and candidates will need to fund infrastructure involving the private sector Governments are progressing regulatory reform to allow PPPs in infrastructure sectors dominated by the state, but there are mixed experiences Road and rail projects likely to be focus of initial attention Projects for education and military accommodation considered in Czech Republic and other countries. A number of countries considering “separate fund-type” solutions for the funding of their road infrastructure (e.g. Poland) EU Funding On accession, the New EU Member States became eligible for increased levels of EU grant funding. While availability of EU funding is a great benefit, co-financing requirements (for instance with Cohesion and Structural funding) translates to significant financing commitment for New Member States that aim to fully absorb EU funding. While the EU Commission has stated that private co-financing is acceptable and should be encouraged, New EU Member States have rarely combined EU funding with private finance For the right projects, governments could benefit from combining EU funding with private finance Citigroup has been advisors on two of the largest infrastructure transactions which combined EU grants and private finance: Second Tagus Bridge (Portugal) and Athens International Airport (Greece) 6

Case Studies: Co-financing Using Private Funds Project to build, own and operate the c.€900m Second Tagus Crossing near Lisbon, Portugal 1995 Advisor to the Lusoponte Consortium ►    Citigroup advised an international consortium on its successful bid to build and operate a new bridge across the river Tagus in Lisbon and also to operate the existing 25th April bridge. ►    The financing package totaled c.180m Contos (c.€900m) and included: 82.5m Contos (€413m) of EU and Portuguese government grants, 16.5m Contos (€83m) of shareholder funding 60m Contos (€300m) of DM and Escudo EIB loans guaranteed by a syndicate of banks ►    Agreement by the EIB, for the first time, to fix the interest rate on a large part of their loans at signature. 23-year final maturities on loans     Financing of the Athens Spata International Airport 1995 Advisor to the Greek Government ►    Citigroup was advisor to the Greek government in the structuring and implementation of the tender to the private sector for the construction of the new Athens Spata International Airport. ►    Private financing was completed via a syndicate of mostly German banks ►    EIB loans were made available for c. 50% of total construction costs with a total maturity of 25 years ►    Greek government agreed to seek to secure two EC grants (€150m & €250m), and agreed to make those grants itself if EC funds were not made forthcoming ►    Greek government agreed to levy an additional passenger departure fee from November 1994 until at least 2014 (the “Spata Airport Development Fund”). Government retains “sovereignty” in respect of its ability to levy, vary or not levy taxes. Government committed to make these amounts, or an alternative guaranteed minimum of €45m p.a., available to fund the construction ►    Represents the first successfully completed PPP structure for a European airport   7

Case Study: PPP in Poland A1 Advisor to GTC consortium 2005 Construction and operation of a motorway from Gdansk to Torun under a 30yr concession ►    Citigroup advised the GTC consortium, led by Skanska on the development and limited recourse financing of the €700m A1 motorway (Gdansk-Torun) under a 35 year concession. ►   The project is PPP with availability payments and shadow tolls paid by the Government to the concessionaire, with real tolls paid by the users contributing to the Government obligations. ► The project was financed by long term debt from EIB and NIB; EIB and NIB do not rely on a commercial guarantee but on the strength of the project and the contractual structure ► The concession agreement and contractual framework were designed to provide protection to debt financiers, which allowed the concessionaire to attract very competitive financing terms from EIB and NIB without a Government or commercial guarantee of the debt.         8

Case Studies: Summary                     Poland A1 Government Contribution Upfront Upfront Ongoing    EU Grant Contribution EIB Loans       Development of Infrastructure    Quicker implementation    Pre-Operational Risk Transfer Usage Risk Transfer Demand Demand Availability Alignment of interests (Focus on whole-life costs)    Innovation and Best Practice    In conclusion: As evident, introduction of the private sector through PPPs brings significant benefits As previous beneficiaries of EU grant funding, New EU members will benefit from deploying private finance as a source of co-financing (for the right project) in order to make full use of the increased EU funds now available 9

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