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Project Management
Spring 2009

Private Finance Initiative

ogy
 Private Finance Initiative
Denationalization program of Margaret Thatcher (British Prime
Minister in the 1980’s)
The concept of PFI was introduced in 1992.
Unlike privatization the emphasis of PFI is not on “asset
acquisition” but on “procurement of service”

The Concept:
“The Private Sector will provide funding for the capital project
and will operate the facility to provide a public service”
“Revenue will be achieved either directly from the user or
through a payment mechanism negotiated with the public
sector”

Government’s Role:
“Provision of public services,” not acquisition of capital assets.
Arguments for popularity of PFI
Primarily: Government budgets have been capped; thus less funding is
available for acquisition of capital assets
Government’s ability to borrow has been curtailed (see above)
Direct user fees provide a clear conduit for capital recovery, avoiding
governmental bureaucracy.
Efficiency arguments: Design-Build-Operate nature of PFI projects
allows for greater efficiency
Private sector can/could manage and operate projects in a more efficient
manner?

Implementation:
Financially free-standing projects
Joint venture projects
Sale of services
Issues of importance to success of PFI’s
Educating government agencies (specifically local authorities) about
“do’s” and “don’ts” of PFI service delivery
Risks
Legal limits
Cost of capital (commercial roles vs. tax-free bonds)
Bidding for PFI projects
In the case of joint venture type of PFI, government authority is faced
with:
Whether the project will proceed at all; if so
Whether the project will be procured
Whether procured traditionally or as a PFI one; if so
How to choose aPFI upplier.
PFIssu pplier.
The last point is typically the main cause of contention between
the governmental authority and PFI bidders.
Large sums of money invo lved in bid preparation
involved
Long negotiating time
Lack of experience on both sides
Construction Industry’s Role:
Since they know how to build and - on many occasions - how to maintain
infrastructure projects, they werethe
themain
mainplayers
playersthese types of PFI projects.
thesetypes
Their weaknesses:
Lack of capital to participate in capitalization
Lack of experience in operation & cost flow management
Lack of experience in long-term nature of the projects
Lack of experience with management of PFI’s risks
The design officers are inexperienced in translating demand for services
into design

Public Sector’s Role

Protection of public funds
Value for Money (VFM) criterion
Ambiguity over risk assumption & risk allocation
Lack of Experience & Expertise in Writing an “Output Specification” or “Service
Provision Document” as against an “Asset Provision Document”
Lack of Experience with past projects; thus a need for comparison on the basis of
“VFM” especially when public funding is being committed.

Project involved No comparator

No VFM test
public money? required

Is public sector
No comparator
main source of
required
revenue?
Test for VFM against
alternative use of funds
Might have
No comparator
gone ahead if
required
publicly funded

Test for VFM through

competition and
Is a PSC No comparator
external benchmarks
available? required
Test for VFM through
Use a PSC competition and
external benchmarks
vs. comparator
 Public – Private Responsibilities

When the project cannot be financed by the private sector, then

the public sector enters in a variety of forms in order to close the
gap between commercial financial analysis and social cost-benefit
analysis.
 Means for making projects feasible:

Public Sector assumes additional risk sharing, thus increasing the

robustness of the project cash flow and, in turn, attracting
lenders with a better rate of interest.
If the problem cannot be resolved by risk sharing, then the
public sector could take an additional equity stake in the project.
The public sector could generate additional revenue. (Case of
Athens Airport. Government imposed additional tax on airline
tickets.)
Indirect Means Such as:
Tax Holidays
Grace Period
Soft Loan(s)
Infrastructure Project Global Lead Arrangers –
Bank Loans (US $ Millions) 2005 and 2006
2006
2006 2005 Number of Amount Percent of
Rank Name Rank Facilities Underwritten Total
1. Royal Bank of Scotland 4 76 $12,029 7.1%
2. Calyon 3 69 8,745 5.1
3. Societe Generale 1 45 7,037 4.1
4. JBIC 7 7 5,935 3.7
5. BNP Paribas 2 54 5,854 3.4
6. HSBC 14 39 5,307 3.1
7. BBVA Grupo 22 35 5,213 3.1
8. West LB 6 42 4,094 2.5
9. Goldman Sachs 20 30 4,053 2.5
10. European Investment Bank 37 14 3,994 2.5
Other 1,006 98,705 62.9
Total 1,417 $160,966 100.0%
Infrastructure Project Global Lead Managers –
Bonds (US $ Millions) 2005 and 2006
2006
2006 2005 Number of Amount Percent of
Rank Name Rank Facilities Underwritten Total
1. Credit Suisse 8 7 $3,340 16.9%
2. ABN Amro 12 2 1,564 7.9
3. HSBC a 3 1,537 7.9
4. Citigroup 1 2 1,435 7.3
5. Deutsche Bank 6 4 1,393 7.1
6. Lehman Brothers 3 4 1,350 6.8
7. Royal Bank of Scotland 20 5 1,188 6.0
8. Morgan Stanley a 3 1,066 5.4
9. Goldman Sachs 2 6 997 5.0
10. Barclays 9 4 972 4.9
Other 26 4,862 24.9
Total 66 $19,704 100.0%
Infrastructure Project Global Lead Arrangers, PPPs
– Bank Loans (US$ Millions): 2005 & 2006
2006
2006 2005 Number of Amount Percent of
Rank Name Rank Facilities Underwritten Total
1. European Investment Bank 6 12 $3,076 12.0%
2. Dexia Group 1 20 2,689 10.4
3. Royal Bank of Scotland 8 26 2,590 10.0
4. Epfa Bank 32 10 1,723 6.7
5. BBVA Grupo 28a 8 1,187 4.6
6. Grupo Santander 28a 6 1,143 4.5
7. Caja Madrid 5 7 1,009 3.9
8. Bank of Scotland 3 10 772 3.0
9. Calyon 14 4 761 3.0
10. BNP Paribas 43 4 758 3.0
Other 110 9,772 38.9
Total Market 217 $25,480 100.0%
 Infrastructure Project Global Lead Managers,
PPPs – Bonds (US$ Millions): 2005 and 2006
2006
2006 2005 Number of Amount Percent of
Rank Name Rank Facilities Underwritten Total
1. ABN Amro 4 2 $1,564 15.1%
2. HSBC a 3 1,537 14.8
3. Deutsche Bank 2 4 1,393 13.4
4. Citigroup 7 1 1,281 12.4
5. Morgan Stanley a 3 1,066 10.3
6. Barclays a 2 733 7.1
7. Royal Bank of Scotland a 1 644 6.2
8. Merrill Lynch a 2 630 6.1
9. RBC Capital Markets 3 3 513 5.0
10. Bank of Scotland a 1 305 2.9
Other 5 681 6.7
Total Market 22 $10,347 100.0%
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d
 Distribution of 620 Construction Contracts by
Numbers of Years

Number of Years
< 1.0 1.1 to 2.0 2.1 to 3.0 3.1 to 4.0 4.1 to 5.0 >5. Mean Median
0
Number 152 244 144 47 13 20 2.1 2.0
Percent 255 39% 23% 8% 2% 3%
 Distribution of Debt Instrument Maturities by
Number of Years: 2000-2006

Number of Years
<5 5 to 9.9 10 to 14.9 15 to 19.9 20 to 25 > Mean Median
Bank Loans 26% 38% 19% 10% 4% 4% 9.9 8.0
Bonds 10% 29% 33% 26% 11% 2% 11.6 10.2

ng

Numb b
Distribution of Initial Debt-to-Total Capitalization
Ratios by Year: 2002 to 2006 (633 projects)

Debt-to-Total Capital 2002 2003 2004 2005 2006 Total

<50% 15% 28% 13% 13% 8% 12%
50%-59% 11 9 10 7 8 9
60%-69% 9 9 10 9 14 12
70%-79% 11 17 22 13 22 22
80%-89% 26 26 23 28 21 24
90% 26 12 22 26 28 21
Total 100% 100% 100% 100% 100% 100%

Mean 71% 58% 71% 74% 75% 71%

Median 80% 71% 76% 76% 78% 76%
 Project Finance Lending by Region: 2002 - 2006

Amount of Project Lending by Region (US$ Billions)

4 Year
Region 2002 2003 2004 2005 2006 Total 02-06 CAGR

Western $23.36 38% $29.40 42% $25.69 22% $55.13 39% $57.84 33% $191.42 34% 25%
Europe
Asia 10.61 17 12.44 18 24.85 21 16.04 11 28.42 16 92.36 16 28

Middle 2.75 4 6.50 9 18.56 16 28.15 20 31.20 15 87.15 15 84

East
North 10.32 17 5.55 8 16.37 14 14.39 10 34.96 20 81.60 14 36
America
Americas 6.22 10 7.24 10 12.59 11 6.59 5 9.05 5 41.69 7 10

Australia 6.06 10 3.81 5 10.73 9 8.92 6 10.79 6 40.31 7 16

/New
Zealand
Africa 1.32 2 1.90 3 4.96 4 6.36 5 6.09 3 21.74 4 40

Eastern 1.54 2 2.72 4 2.69 2 4.66 3 2.26 1 12.83 2 14

Europe
Total 62.18 100% $69.56 100% $116.44 100% $140.30 100% $180.61 100% $569.09 100% 31%
 Project Finance Lending by Sector, 2002 - 2006
Amount of Project Lending by Sector (US$ Billions)
4 Year
Region 2002 2003 2004 2005 2006 Total 02-06 CAGR

Power $20.20 32 $24.07 35 $35.26 30 $44.42 32 $57.11 32 $181.06 32 30

Transpor 13.59 22 14.99 22 23.51 20 28.73 20 44.60 25 125.42 22 35

tation
Oil & 6.44 10 9.03 13 22.52 19 24.04 17 26.37 15 88.40 16 42
Gas
Petroche 5.71 9 5.88 8 8.80 8 6.97 5 20.26 11 47.62 8 37
micals
Leisure 4.76 8 4.44 6 7.00 6 13.28 9 17.25 9 46.76 8 37
&
Property
Telecom 7.29 12 4.99 7 7.34 6 10.19 7 3.14 2 32.59 6 -19

Industrial 0.82 1 3.18 5 5.23 5 4.13 3 4.23 2 17.56 3 51

Mining 1.00 2 1.11 2 3.57 3 2.46 2 3.31 2 11.45 2 35

Water & 0.16 0 1.04 1 2.17 2 3.73 3 3.82 2 10.92 2 121

Sewage
Other 2.21 4 .84 1 1.04 1 2.36 2 0.53 0 6.98 1 -30

Total $62.18 100% $69.56 100% $116.44 100% $140.30 100% $180.61 100% $569.09 100% 31%
Project-Finance Bank Loans by Sector and Region
(US$ Billions), 2002 to 2006
Europe, Asia Americas 2002 to Percent
Middle East, Pacific 2006 of Total
Sector Africa Total

Power $83.35 38.55 59.15 181.06 31.8

Transportation 72.99 37.75 14.69 125.42 22.1
Oil & Gas 43.68 16.69 15.49 88.40 15.5
Petrochemicals 27.72 15.55 4.34 47.62 8.4
Leisure & 37.29 7.83 1.62 46.76 8.2
Property
Telecom 23.50 6.51 2.93 32.95 5.8
Industrial 8.78 4.45 4.27 17.56 3.1
Mining 2.15 3.10 6.19 11.45 2.0
Water & Sewage 8.78 1.28 0.85 10.92 1.9
Other 4.34 1.53 1.12 6.98 1.2
Total $312.58 $133.32 $123.19 $569.09 100%
Percent 54.9% 23.4% 21.6% 100%
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