Financing PPPs: Project Finance October 2007

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Index

Section I. Brief Project Finance Introduction

Section II. Risk Matrix

Section III. Case study: Cuenca Road Network Program

Project Finance

Section IBrief Project Finance Introduction

P. 4

Definition of Project Finance

Definition: A form of financing projects, primarily

based on claims against the financed asset or

project rather than on the sponsor of the project.

However, there are varying degrees of recourse

possible. Repayment is based on the future cash

flows of the project.

Sección I

Project Finance Introduction

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Financing Structure

Shareholders

Construction Joint Venture

Operating Company

CapitalDividends + interest

Principal + Interest

Payment

Payment

CV + CF

Insurance company

Service supplier 1 Service supplier 3 Service supplier 3 Service supplier n

ServiceContracts

Project Company (SPV)

Administration BanksConcessionAgreement

Financialcontracts

ConstructionContract

Operating & Maint.

Contract

Sección I

Project Finance Introduction

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Calendar: Process duration: 4 months

• Feasibility Study

• Contracts & Risk management

• Economic analysis and Financing structure

Financial Advisor: Banks

Financial Structure

Phase I

Risk analysis

Phase II

Financial closing

Phase III

• Term Sheet & IM

• Arrangers: Term Sheet & Contracts negotiation

• Financial closing

• Participants: Syndication

Sección I

Project Finance Introduction

P. 7

BBVA Project Finance Experience

Sección I

Project Finance Introduction

Leading Project Finance Bank in Spain

• BBVA enjoys a leading position in project financing in Spain:

- #1 Arranger in 2006- #1 Arranger in 2005- #1 Arranger in 2004- #1 Provider in 2003- #1 Financial Advisor in 2003

Leading Project Finance Bank in the World

• BBVA has played a top level role in the project financing in the world:

- #2 Transport Mandated Lead Arranger in 2006- #3 Wind Mandated Lead Arranger in 2006- #4 Water & Sewage Mandated Lead Arranger in 2006- #10 Power Mandated Lead Arranger in 2006

- #1 Financed Advisor in 2006- #2 Western Europe Mandated Lead Arranger in 2006- #6 Eastern Europe Mandated Lead Arranger in 2006- #10 North America Mandated Lead Arranger in 2006

P. 8

BBVA Project Finance Experience

Sección I

Project Finance Introduction

Roads

• BBVA has extensive experience financing the construction of new build motorways and the acquisition of existing roads. For example:

- BBVA has acted as Mandated Lead Arranger on the acquisition of most of the major recent motorway privatisations including the EUR 370 million Ionia Odos Road Project (2007), the EUR 1.06 billion Variante Sur Metropolitana (2006), Euro 8.3 billion APRR privatisation in France (2006), the USD 3.8 billion Indiana Toll Road (2006), the USD 1.8 billion Chicago Skyway (2004), the Euro 1.6 billion ENA privatisation in Spain (2003) and the CAD 2.3 billion ETR-407 acquisition financing in Canada (1999)

- BBVA has acted on some of the most innovative new build financings in North America and Europe including the Euro 232 million Eurolink N4/N6 - the first PPP toll road in Ireland (2003), the NOK 3.2 billion E18 motorway in Norway (2006) and the USD 400 million SR-125 (2003) in San Diego, the first private toll road in the US involving TIFIA funding

• BBVA’s experience includes real toll roads, shadow toll roads and availability based roads

• BBVA has extensive experience in Latin America. Portfolio includes projects in Argentina, Chile, Colombia and Mexico.

• BBVA is one of the world’s leading arrangers of infrastructure financings.

Other Transportation

• BBVA has acted as Mandated Lead Arranger on the financing of transportation infrastructure projects including high speed rail (TP Ferro high speed rail link between Span and France), light rail (Metro de Tenerife and Woolwich Arsenal Docklands Light Railway), container ports (Puerto de Málaga), airports (BAA), parkings (Icon Parkings) and passenger interchange stations (Intercambiador de Castilla).

Project Finance

Section IIRisk Matrix

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Main risksRisk Matrix

Building & Operational Risk:

► Building risk

► Demand risk

► Operating risk

Financial & Economic Risk:

Section II

► Interest rates risk► Inflation risk► Syndication risk

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Risk mitigation

Cost Construction Contract Fixed price

Delay Construction Contract Penalty clause

Technical performance Construction Contract Penalty clause

Operating Operation Contract Technical advisor will control the operation

Traffic Concession contract Fix tariff

Tariff / Law Concession contract Tariff will compensate traffic and law changes

Force Majeure Concession contract Concession agreement will cover these risk

Political risk Concession contract Concession agreement will cover these risk

Contracts will provide mechanisms to mitigate the risk:

Mitigation mechanismContract

Contractual structure & risk mitigation

Risk:

Section II

Risk Matrix

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Other risk mitigations

• Sponsors Technical & Financial solvency.

• EPC Contract.

Long warranty periods.

Penalty clauses.

• Operating & Maint. Contract.

Extension definition.

Length.

Cost limits.

• Due diligence. External advisors

• Insurance program

Section II

Risk Matrix

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Advisors & Insurance Program

Insurance program

External Advisors

Traffic Advisor

Insurance Advisor

Legal Advisor

Technical Advisor

Model Auditor

Construction

Operating

Damages

ALOP

Civil liability

ALOP

Civil liability

Force Majeure

Section II

Risk Matrix

Project Finance

Section IIICase study: Cuenca Province Road Network

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Project Description

Sección III

► Construction and maintenance of 458 km of roads in Cuenca province.

► Concession term: 17 years.

► Investments: Construction period: Eur 45 million investment Operational period: Eur 30 million CAPEX

► Shadow toll scheme.

► Concession company: “Conquense de Infraestructuras S.A.”

► Five shareholders who are the main construction companies in the province.

► Concession contract with the local authority.

Case Study

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Principal participants & contracts

Excelentísima Diputación Provincial de Cuenca

BBVA Arranger

Eptisa Technical advisor

Cuatrecasas / DLA Legal advisor

Heath Lambert Insurance advisor

Tool Ulle Demand advisor

PWC Model auditor

Other/AdvisorsSponsors/Shareholders5 Construction companies

Construction contract with a Joint Venture of all concession company shareholders.

Maintenance contract with a company formed by the five shareholders of the concession company.

Administrative contracts: concession contract, etc.

Insurance contracts

Financial contracts: Senior Loan, VAT Loan, Swaps, etc.

Contract structure

Sección III

Case Study

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Structure

Sección III

Concession Contract

Cuenca Local Authority

Conquense de Infraestructuras S.A.

Construction Joint Venture

Conquense de Conservación S.L.

Construction Contract

Maintenance Contract

BanksFinancing Contracts

Case Study

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Risks and Guarantees

Construction period

• Any construction risk

• Civil liability

Maintenance period

• Material Damage

• Civil liability

• Environment liability

• Terrorism

Construction Risk

Contingency

• Delays in project opening

• Overcost due to delays

Guaranties

• Sponsors guaranties and penalties

• Construction Insurance

Maintenance Risk

Contingency

• Unable to face debt service

• Maintenance overcost

Guaranties

• Sponsors guarantees and penalties

• CAPEX reserve accounts

• New bank maintenance budgets

• Contractor guarantees

• Sponsors experience

• Proven technology

Technological Risk

Insurance Risk

Sección III

Case Study

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Financial Risk

• Credit risk of the project

• 100% IRS of outstanding debt during the concession period.

• Conservative forecast

Legal risk

Contingencies

• Cancellation Management Contract

• Change in tariffs

Guaranties

• Grantor compensation

Sección III

Case Study Risks and Guarantees

P. 20

Other Project guarantees

Real Guarantees

Asset mortgage commitment

Pledges of:

• Management Contract

• Project Contracts

• IRS Contracts

• Insurance Contracts

Pledge of Concession company

Fulfill of financial ratios

Sección III

Case Study

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Project Strengths & Weaknesses

Project Strengths

• Sponsors experience

• Technical solvency

• Support of the sponsors

Project Weaknesses

• Legal changes

• Tariff changes

• Administrative problems (licenses & permits)

Main issues to obtain internal credit committees approvals

• Suitable financial structure

• Favorable legal and administrative framework

• Technological risk guarantees

• Public interest asset

• Correct risk distribution

Sección III

Case Study