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

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. 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. Three
Questions
• Where
does
the
money
come
from?
• How
the
money
is
allocated?
• How
to
ensure
that
the
money
is
properly
used?

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. 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. 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. 1.2
Project
Financing
Process
Conduct
Feasibility
Study
Syndicate
Banks
Prepare
Legal
Files
Negotiate
and
Make
Changes
Sign
Official
Paperwork

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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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
http://www.youtube.com/watch?v=6oglmRNQ5fA
3:20

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. 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. 3.2
Project
Sponsors
Skyway
Concession
Company
Australian
Macquarie
Infrastructure
Group
The
City
of
Chicago
Chicago
Skyway
Transporte
South
America
Form
PPP

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. 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. • 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. Toll
changes
Data
source:
http://www.chicagoskyway.org/tolls/

33. 3.5
Benefits
of
PPP
• Increases
the
governments’
efficiency
as
well
as
benefits
the
private
sectors
• The
government
• SCC
• Local
commuters

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. 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. References
City
of
Chicago.
(2010).
Public
Private
Partnerships.
Retrieved
from
http://www.cityofchicago.org/city/en/depts/fin/
supp_info/public_private_partnerships.html
Chicago’s
Department
of
Street
and
Sanitation
(CDSS).
(2010).
About
Us-­‐Mission.
Retrieved
from
https://
www.cityofchicago.org/city/en/depts/streets.html
International
Project
Finance
Association
(IPFA),
(n.d.).
About
Project
Finance.
Retrieved
from
http://www.ipfa.org/about/
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:
http://www.macquarie.com/mgl/com/
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:
http://tollroadsnews.com/news/skyway-­‐is-­‐interstate-­‐90-­‐unless-­‐state-­‐withdraws-­‐reports-­‐-­‐-­‐feds
Skyway
Concession
Company,
LLC.
(2005).
About
the
Skyway.
Retrieved
from
http://www.chicagoskyway.org/.
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:
http://docs.newsbank.com
Transporte
South
America
(2000).
About
History
of
Transporte
South
America.
Retrieved
from:
http://www.cintra.es
Zhang,
J.
(2003).
Project
Financing,
Edition
2,
Beijing,
PRC:
Citic
Press
Group
Inc.

37. Questions?
Thank You!