European Federation of Railways Trackworks Contractors

Financing European Transport Infrastructure

Vice President Wolfgang RothEuropean Investment Bank

Amsterdam, 2 December 2005

EUROPEAN INVESTMENT BANK

OBJECTIVES AND PRIORITIES

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EIB - European Union’s financing institution:

Created by the Treaty of Rome in 1958, to provide long-term finance for projects promoting European integration.

Subscribed capital EUR 163.7bn.

EIB shareholders: 25 Member States of the European Union.

Lending in 2004: EUR 43.2bn (EUR 39.7 bn within the EU).

Total outstanding loans at 31.12.2004: EUR 265.8bn.

The EIB implements EU policies

Development of Trans European and Access Networks is one of five key strategic priorities set by the Board of Governors of the EIB. 3

EIB Strategic Outlook

Five core priorities

Economic and social cohesion in an enlarged EU.

Development of Trans-European and Access networks (TENs).

Environmental Protection and Improvement, including Climate Change and Renewable Energy.

Implementing of the Innovation 2010 Initiative (i2i).

Support of EU Development and Cooperation Policies in Partner Countries.

EIB implements EU policies - a policy driven Bank. 4

32%

8%

31%

11%

6%

12%

Loan Signatures in the European Union 2000-2004: EUR 180.2 bn

By sector

Energy

Communications

Water management and sundry

Industry, services, agriculture

Education, health

Global loans

Promoting EU policies of economic and social cohesion. 5

59%

19%

9%

13%

European Communications Infrastructure 2000-2004 Individual loans: EUR 44.8bn

Land-based transport

Air transport

Telecom

Sundry

Arteries of the single market 6

The DEMAND for

TRANSPORT and RAIL INVESTMENT

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EIB total loan approvals to TEN-T projects since 1993:

EUR 66 bn in EU15 Member States;

EUR 12 bn in Central and Eastern Europe.

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EU Growth Initiative and EIB

The EU Growth Initiative requires major investment in transport networks across Europe.

EIB is a policy-driven European institution. As such, EIB is adapting its financial products to better serve the objectives identified in the EU Growth Initiative.

Improve the range of financial instruments available from the Bank and increase the EIB resources available for the development of TENs transport to 2010.

Take additional risk where it adds value, but apply appropriate risk pricing.

Strengthen and, where possible, accelerate the investment in TENs.

… in collaboration with the Commission, Member State Authorities and the Private Sector. 9

EIB wider role in the Growth Initiative

Financing of transport infrastructure is a core expertise of EIB. Dedicated organisation has been established and is proven.

EIB is a strategic advisor to the Commission, Member States and Public Authorities on TENs and other institutional issues. It collaborates effectively with national PPP taskforces.

Proven risk management record with increasing use of structured finance, securitisation, banking and capital markets.

Commission and EIB have an established common interest in realising the Community objectives. Combined use of bugetary resources and EIB loans is envisaged under the Growth Initiative.

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Trans European Transport Network (TEN-T)Investment challenges for the European Union until 2010:

75 200 kilometres of roads.

79 400 kilometres of railways.

430 airports.

270 international seaports.

210 inland ports.

traffic management systems, user information and navigation services.

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EU Growth Initiative

Context : some figures…– Total cost of TENs programme : EUR 600bn up to 2020.– Priority Projects : EUR 220bn.– TENs - T Quick Start Programme : EUR 38bn.

Expected Private Sector Contribution : 10-100%.

Private investment is to be a substantial additional resource for implementing TENs on projects that deliver sufficient profitability.

13Critical role of PPPs, in particular in the Transport Sector.

Trans-European Networks - Transport

• EIB Lending Programme– 2004-2006: EUR 25 bn for TEN-T.

– 2004-2010: EUR 50 bn for TEN-T.

• Special attention to “priority” projects …

… as subsections of 30 priority corridors/projects in the transport sector:– 17 railway projects.– 5 mixed rail/road or intermodal projects.

– 3 roads.

– 3 maritime/inland waterways.

– 1 airport.

– 1 Galileo Satellite Navigation System.

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…EIB seeks to promote private sector participation through equity and debt investors (risk takers).

TEN-T until 2020 (source EC) EUR 190 bn from Priority TEN-T. EUR 380 bn from overall van Miert Group proposals.

Urban and light rail over 20 years (source European Rail Research Council) EUR 140 bn of which EUR 30 bn in rolling stock.

Top-down approach (source Back of the Envelope) EU-15 GDP : EUR 8545 m in 2000 to EUR 16900 m in 2030. EU-25 GDP : EUR 8940 m in 2000 to EUR 18020 m in 2030. “EU-30” GDP : EUR 9610 m in 2000 to EUR 19800 m in 2030. Transport sector investment 1 –1.5% of GDP depending on level of development. Share of railways in transport sector investments : 30%. Annual investment demand in European railway sector rises from EUR 30 bn

(2000) to EUR 60 bn (2030) in 2000 prices.

How much in PPP?

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Investment Demand in Railways

RISKS INVOLVED IN INVESTING IN RAIL

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Deliverability of Transport ProjectsMain Challenges in a Lender’s View

Planning and permitting process: Complex projects and many parties.

Design optimisation under technical, environmental, financial, legal and regulatory constraints: Long time to decisions and final design.

Structuring of the procurement and financing including correct costing: Complexity encourages keeping costs on public budget.

Funding: Complexity of most railway projects reduces scope for risk sharing and PPP-type financing.

Construction on time and on budget: Average construction costs in railways 40% higher than forecast1.

Ramp-up risk: Targeted by new EU Community Guarantee.

Source: (1) Procedures for Dealing with Optimism Bias in Transport Planning (British Department of Transport, 2004);17

Demand for Asset and Risk Assessment

• Average number of rail passengers 39% lower than forecast2.• Responses to uncertainty:

– Careful analysis of base case assumptions for initial level and growth of demand.

– Construction delays impact both costs but also revenues.– Ramp-up period may be slower than anticipated.– Replace static “number” estimate with probability distribution.– Use simulation to better understand risk impact of multiple

variables.– Guarantee release conditions.– “Natural” hedges (e.g. weights to revenue & costs linked to

inflation).• Uncertainty decreases during project cycle.

Rail projects inherently risky (before structuring).Source (2) Megaprojects and risk (Flyvbjerg, Bruzelius, and Rothengatter, 2003).

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PPP – a tool for bridging the gap

Principles of Risk Allocation, Risk Management and Mitigation (1/2)

• Main Characteristics of PPPs

– Risk-sharing between public and private sectors.

– Long-term relationship between parties.

– Public service and ultimate regulatory responsibility remain in public sector.

• Using private sector skills for public sector services

– Contracts for services, not procurement of assets.

– Output, not input, specifications.

– Payments related to service delivery.– Whole life approach to design, build and operation.

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Principles of Risk Allocation, Risk Management and Mitigation (2/2)

• Criteria for PPPs – Economically viable for the Public Sector.– Financially viable for the Private Sector.– Appropriate Risk and Reward Balance for Public and Private Sector.– Public Sector: value for money.

• “Must” for successful PPPs – Public Sector Political Commitment.– Focused, dedicated and experienced public sector team – PPP Task

Force.– Clear legal and institutional framework.– Transparent and competitive procurement.– Realistic risk sharing. – Government Partnership. 20

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EIB’s approach to PPPs

Competitive tendering.

Non-exclusivity - support of all bidders through bidding stage.

Investment Grade Risks on strategic public services.

EIB Complementarity with and leveraging of banks and capital markets.

EIB benefits passed to end-users/taxpayer.

Utility Risk and Utility Reward.

EIB Financing Principles

Policy driven approach to PPPs based on the evaluation of the benefits achievable.

PPPs are an additional policy option. No bias in favour of any particular procurement method.

Expand expertise and financial resources available for “infrastructure” investment.

Facilitating greater private sector investment.

Focus on strategic public services with clear Value Added.

EIB’s approach to PPPs

Project selection and appraisal

Close collaboration with public sector to identify suitable priority projects.

EIB aims to support competitive pressure during procurement process.

Focus on the project:• Risk assessment.• Economic performance: socio-economic profitability

(risk of adverse selection of projects), value for money for public sector.

EIB financing for PPPsBy volume : total EIB lending to PPPs of EUR 16 bn

EIB & PPP: Annual Financings closed(in m EUR)

0

500

1000

1500

2000

2500

3000

3500

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

39%

22%

17%

7%

6% 5%2%2%

Roads and MotorwaysTunnels and BridgesUrban Development, Renovation and TransportAirportsTraditional and High Speed TrainsSocial Infrastructure (Education and Health)Drinking and Water, Water TreatmentPower Generation, Transmission and Distribution

EIB financing for PPPsBy sector : transport dominates (85%)

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3. Lessons learned from EIB’s PPP experience

The importance of procurement. The evidence of project performance. Sectoral focus in PPP programmes. Effective payment mechanisms. Scale and expertise in PPP programmes. Developments at European Union level.

Key lessons from the Bank’s PPP experience

Competitive pressure in procurement a must for achieving Value for Money from PPPs.

Tendering process can be complex and, sometimes, costly.

Public and private sector need appropriate skills to design, respond to and appraise procurement documentation.

Full compliance with EU legislation key requirement for EIB funding.

Importance of procurement

National audit authorities commit significant resources to assessing PPP Value for Money.

Reports are an important source of information, learning and benchmarking.

For example, UK National Audit Office:– Cost and time performance in major infrastructure

generally good.– Performance in IT sector generally weak.

Evidence on PPP performance

Conventional procurement

PPP procurement

Cost overruns for the public sector 73% 22%

Delay in project delivery 70% 24%

PPP performance:Evidence on construction projects from the UK’s National Audit Office

Most countries commence PPP programmes in transport, with later migration to other sectors.

Rate of ‘migration’ to other sectors (health, education, energy, water, waste treatment) reflects i) national priorities and ii) legal frameworks.

Tendency for project to cascade from central to local government / municipalities.

Sectoral focus

Conclusions

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  Substantial investments required to achieve regional, social and

economic cohesion.

Public finances and sector deregulation require increased private sector funding also to meet transport infrastructure investment needs.

EIB is adapting its financial products to better serve the implementation of TEN-T and co-operate more closely with the private sector.

Private sector is willing to take only well-defined and manageable risks and demand risk-related remuneration.

Careful project structuring allows for separately deliverable components, which meet financiers needs and risk appetite.

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