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Project Financing in Public Projects

Briefly introduced project financing in public projects. Using case study of Chicago Skyway Operating Long-term Lease.

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Project Financing in Public Projects

  1. 1. 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    
  2. 2. Table  of  Contents   Introduction                                                                                                                                                                    Conclusion   1Project  Financing  in   Public  Construction   Projects   2 3 Project  Financing   Process:  Feasibility   Analysis  and  Risk   Control     Case  study-­‐-­‐-­‐  Chicago   Skyway  Long-­‐term   Operating  Lease    
  3. 3. Three  Questions       •  Where  does  the  money  come   from?   •  How  the  money  is  allocated?   •  How  to  ensure  that  the  money  is   properly  used?  
  4. 4. 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
  5. 5. 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.”    
  6. 6. 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.  
  7. 7. 1.2  Project  Financing  Process   Conduct   Feasibility   Study   Syndicate   Banks   Prepare   Legal   Files   Negotiate   and  Make   Changes   Sign  Official     Paperwork    
  8. 8. 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  
  9. 9. 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  
  10. 10. 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.  
  11. 11. 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  
  12. 12. 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  
  13. 13. 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.    
  14. 14. 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).  
  15. 15. 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  
  16. 16. 2 Project  Financing   Process:  Feasibility   analysis  and  Risk  control 2.1  Feasibility  Analysis   2.2  Risk  Recognition  in  Public  Projects     2.3  Risk  Management  
  17. 17. 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
  18. 18. 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.    
  19. 19. 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
  20. 20. 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
  21. 21. 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  
  22. 22. 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    
  23. 23. 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
  24. 24. 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  
  25. 25. 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   3:20
  26. 26. 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.  
  27. 27. 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.      
  28. 28. 3.2  Project  Sponsors Skyway   Concession   Company   Australian   Macquarie   Infrastructure   Group     The  City  of   Chicago   Chicago   Skyway   Transporte   South   America   Form  PPP
  29. 29. 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.    
  30. 30. 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.    
  31. 31. •  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).    
  32. 32. Toll  changes Data  source:
  33. 33. 3.5  Benefits  of  PPP •  Increases  the  governments’  efficiency  as   well  as  benefits  the  private  sectors   •  The  government     •  SCC   •  Local  commuters  
  34. 34. 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.  
  35. 35. 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!  
  36. 36. References   City  of  Chicago.  (2010).  Public  Private  Partnerships.  Retrieved  from supp_info/public_private_partnerships.html       Chicago’s  Department  of  Street  and  Sanitation  (CDSS).  (2010).  About  Us-­‐Mission.  Retrieved  from  https://       International  Project  Finance  Association  (IPFA),  (n.d.).  About  Project  Finance.  Retrieved  from 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: 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:­‐is-­‐interstate-­‐90-­‐unless-­‐state-­‐withdraws-­‐reports-­‐-­‐-­‐feds      Skyway  Concession  Company,  LLC.  (2005).  About  the  Skyway.  Retrieved  from     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:      Transporte  South  America  (2000).  About  History  of  Transporte  South  America.  Retrieved  from:     Zhang,  J.  (2003).  Project  Financing,  Edition  2,  Beijing,  PRC:  Citic  Press  Group  Inc.    
  37. 37. Questions? Thank You!