New Financing Trends and Consequences on the Tunnelling Contracts

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Introduction, By Yann Leblais

It is important to bear in mind that the Open Session is a continuity to the previous one in Seoul WTC 2006, entitled “Risk Management on Tunnel Projects”.
Nearly worldwide, the market is facing a new model for financing a part of the infrastructure projects: the Public Private Partnerships, or PPPs. It appears interesting to the ITA to give to the tunnelling community a look on what might change in the relationship between the stakeholders to the project, from the owner to the contractors and operators. The audience to the session might be composed largely by engineers or participants to the construction chain including owners.
In a classical public procurement model applied to the large infrastructure schemes, the things are quite well known and similar from a country to an other, even with some changes from the local regulations. Based on its needs, the owner defines the operational objectives and the program of investment for the infrastructure. He defines the construction parts to the project, here the tunnels, with the help of an engineer he appoints for. The engineer specifies the technical and economical description of the project and elaborates the terms of reference for a bidding procedure the contractors will answer to. The contractors are selected on the basic solution or an alternative and build the projects under the direction of the engineer. The liability scheme is strongly variable depending on the countries national regulation ; based on it, each player set in place the adequate cover of his own liability.
In a PPP scheme, some main changes occur in the relationship between the stakeholders. The public owner is asking for a combined technical, operational and financial answer to its needs. This answer is based on a level of definition of the project which might vary a lot depending on the local regulations and the ability of the owner, only to mention some of them. The answer is brought, through a competitive dialog procedure or similar, by a dedicated body (SPV: Special Purpose Vehicle) which gathers financial, design and construction, operational capacities, not forgetting the liability component. Most often, the SPV subcontracts the civil and equipment works, design and construction, to a SPC (Special Purpose Company) in charge of building the infrastructure. The SPV is liable not only for a construction target but mainly for an operational one and, both, for a long period of time. It appears quite clearly that the design and construction chain is deeply modified as well as the consequences in any failure in the operations in the life of the project.
Who is interested in such an evolution and why? Which are the roles of the stakeholders? Why are they different to a classical procedure? Who is liable for what? These are some questions the lecturers in the Open Session will throw light on.

European Investment Bank - Henry MARTY-GAUQUIE

Les besoins d’investissements en infrastructures de transport dans une Union à 27 pays membres sont estimés à quelque 600 milliards d’€ sur la période 2004-2020, dont 450 milliards pour les seuls réseaux transeuropéens (RTE-T). La réalisation de ce considérable effort d’investissement amène à relever un double défi : d’une part, celui de maintenir un niveau élevé d’investissement collectif dans les pays de l’Union à 15 malgré la raréfaction des ressources budgétaires disponibles, européennes ou nationales ; d’autre part, la modernisation accélérée et le renforcement capacitaire des nouveaux pays membres, qui bénéficieront d’un important soutien financier de l’Union européenne. Dans les deux cas de figure, l’argent public doit être utilisé avec discernement afin d’optimiser son effet de catalyse pour mobiliser les ressources financières privées, notamment dans le cas de gestions déléguées ou de contrats de partenariat public-privé « PPP ».
Dans ce contexte, la gestion des risques induits par les projets d’investissement apparait essentielle. A cet égard, le point de vue du financier se porte moins sur la maîtrise des risques techniques de construction, certes très complexes mais pour lesquels les opérateurs sont généralement bien munis, que sur les risques économiques, commerciaux, voire politiques notamment dans le cas de projets transfrontaliers ou réalisés en PPP.
Le Groupe BEI, en sa qualité d’institution financière de l’Union européenne, a fortement contribué à l’effort d’investissement des RTE-T en investissant dans ce secteur plus de 80 milliards d’€ depuis le milieu des années ‘90. Outre des produits financiers adaptés aux caractéristiques de ces projets (importance des moyens financiers, durée longue, retour sur investissement différé), le Groupe a développé une palette d’instruments financiers et d’assistance technique à projets qui visent à rassurer les investisseurs privés sur la qualité des projets, la pérennité du cadre économique dans lequel ils sont réalisés et le potage du risque financier. En synergie avec les actions de la Commission européenne, le Groupe BEI compte ainsi appuyer une part significative –entre 30 et 50%- des investissements nécessaires à l’intégration de l’Union par les systèmes de transport, notamment pour les projets dits « prioritaires » et pour ceux intéressant les nouveaux pays membres.

Financial Investor - VINCI Concession: Vincent PIRON

PPP from the economic point of view
It is worth noting that PPP are usually dealt from the legal point of view, and now from the financial point of view. But in fact the main aim of PPP’s is to improve the economical efficiency of our countries, facing an increasing competition from what we called before the “developing countries”, now the “dragons”. And when the dragons reach the size of China, Indian, Russia and Brazil, it is really crucial that the old Europe increases it own efficiency, wherever it may be.
The PPP’s contracting process improves the way Public Authorities are managing their purchase process in many ways. Firstly the long term view (whole life cycle) leads to sizable savings, mainly in terms of engineering and maintenance. Secondly the financing is an incentive for the private partner to deliver the project as soon as possible. And finally the socio-economical benefit of the project appears quicker than using a standard procurement procedure.
Obviously this is not a reason to place all contracts with a PPP procedure. Indeed there is an important drawback to that process: it creates some rigidity in the future public budget. Thus the balance between advantages and drawback must be clearly considered. This is the main reason why in France the “Conseil Constitutionnel” has drawn the attention of the lawmakers about the selection process: which contract can be done with PPP procedures and which is better to be implemented under a traditional procurement.

Contractor - Martin HOLFELDER – Bilfinger-Berger Bau

New Financing Trends / Change in the economical approach from the Investor’s and Tunnel-Contractor’s point of view

The Bilfinger Berger Multi Service Group will present a general overview of the co-operation between the two segments “Civil Engineering” and “Concessions”. When making the decision for the participation in a PPP Tunnel project as well as during the co-ordination meetings for EOI- and Tender phase the expectations of these two parties of Tunnelling and Concessions have to be determined:
Which contractual regulations and characteristics are acceptable for both BOT and Tunnel-construction?
Which areas must be defined as “no-go factors”?
How can the different risks be managed and/ or the possible chances within “Tunnel concession projects” be evaluated?
Following the decision about the re-financing principle of tolling-concept (traffic-risk with the Concessionaire) or Availability Fee-concept (traffic-risk with the Concessor) the following risks must be discussed and finally allocated:
Ground / Soil risk
Up-to-date Equipment risk at the end of the Concession period
Risk of Construction schedule delays / chance to reach early completion bonus
Interface between Construction Contractor, Operator, and Concessionaire
Definition and evaluation of the optimal life-cycle costs (larger investment – lower operation and maintenance costs versus lower investment – higher operation and maintenance costs) and the meaning for the state and the user
Technical and constructive alternative offers and their effects on the project (including risk-share)
Each and every party (Construction Contractor, Operator, Concessionaire and Concessor) shall take the risks, which it can influence and estimate best !
Furthermore the main key topics (beside others) for the tunnel builders are:
Liquidated damages and
“fit for purpose”-necessities
which have to be taken into consideration during the tendering and the construction phase. Therefore, the risks have to be recognized, defined and evaluated despite some pre-determined judgment criteria concerning the minimization or rather exclusion of these risks.
The executing construction company of the tunnel building is familiar with the classic fields of the “early construction sphere” and therefore an accurate organization, know-how and proper management have to be set up.
The equity investor has to optimize the PPP-project – specifically regarding the wishes of the concessor – and will have to win the external lenders (banks) to support the offer. Following the nomination of being preferred bidder, the whole consortium has to successfully reach Commercial and Financial Close of the Concession. This will only be achievable with a harmonically adjusted and fairly considered overall bid resulting out of the areas of construction works execution, operation and (heavy) maintenance for the concession period.

Engineering sector perspectives - Yann LEBLAIS, Arcadis

In the PPP schemes, in its seeking for improving value for money, the public client asks for a global answer to its needs through a life-cycle cost which combines design, construction, operation, maintenance and financing. As a main consequence, the bidders are liable for a long period of time. It appears quite clearly that the design chain is deeply impacted, from upstream to downstream. As a specific consequence, the designer might deal with any failure in the operations during the whole life of the project. This scheme applies to any infrastructure project, including tunnels or not.
The first part of the lecture reminds the specificity of the tunnelling activity, mainly the ground, water and environmental conditions. In a second part, it presents what are the main market changes and trends for the engineering sector facing the PPP development: are there any new opportunities? The third part relates to the contents and conditions of the answer elaborated by the consortium. The accuracy of the answer the client gets would be based on the level of definition of the project he gives: is it such and how? The paper emphases on the competitive dialogue process and points out the differences with an answer to a conventional bidding. The fourth part is devoted to the three key issues on risk: identification, allocation and covering, especially within the bidder side. Is any risk borne by the party which is the best positioned to assess it and to bear the consequence of its materialisation, as said in PPPs general principles? The conclusion, based on some feedback, draws a perspective which is positive but cautious.

Contractual aspects - Arnold DIX, Counsel at Law

In the 19th century many major infrastructure projects were often funded by the private sector , often effectively in partnership (or with the legal blessing) of the government of the day. In the 20th century State or Public Funded major projects were the major project financing and delivery method used.
However the late 20th century and early 21st century has seen renewed interest in private sector funded projects. In many countries escalating public debt, concern over taxes , and perceived buerocratic inefficiencies’ have sparked renewed interest in Public Private Partnerships – or PPPS.
In PPPs Private sector finance can be used to wholly or partially fund projects. Balancing the Political and economic aspects of the project is at the heart of the legal balancing Act which must be undertaken – no two projects being the same. Clearly setting out the roles and responsibilities of the partners is – as in all partnerships- essential.
The effective sharing of risks and responsibilities is critical – and as with all contracts for under ground works carefully drafted contracts with respect to risks arising from ground conditions are essential.
Ultimately it is the issues surrounding commercial return – the risks and likely return which drive the contractual provisions. However unlike BOOT and other more common contracts, PPPs demand attention to ensure a healthy working partnership between different entities over many years.
This paper briefly explores some key issues for PPP contracts and cites some tunnel project examples.

Re-Insurance sector - Wannick HEIKO (Munich-Re)

In recent years one can observe an increasing demand and interest for privately financed traffic infrastructure projects of which many involve substantial tunneling works. It is claimed that such projects are launched quicker, have shorter planning and construction times and do have lower overall lifecycle cost than projects run by public authorities. Furthermore, more risks are said to be assumed by the private partner.
Not all private traffic infrastructure projects have been a success story though. This paper analyzes the main risk factors attached to PPP or BOT projects with particular emphasis on projects involving tunnel construction and operation. These are mainly project development risks, design and construction risks, technology and performance risks, all kind of operational risks as well as financial and political risks.
The paper gives an overview to what extent risks can be currently transferred to the insurance markets and on possible new products the industry is working on. It is stressing the particular risk exposure resulting from “Delay in Start Up” and “Business Interruption” insurances for tunnels under construction and in operation in view of the poor loss record experienced in recent years. Consequently, the paper underlines the importance of professional risk management practice and introduces endeavors made by the insurance industry to contribute to optimized risk management standards.

Czech representative - Emanuel ŠÍP, Ministery of Transportation

PPP potential in the Czech infrastructural transportation projects.

One of the main priorities of EU Member countries is to secure preparation and realization of infrastructural transportation projects. It concerns both TEN-T projects and other projects on the central and local governments levels. With the increasing investment needs of the countries and municipalities we are facing the pressing issue how to secure financing of the projects and how to solve the discrepancy between the ever increasing investment needs of the public sector and the continuing growth of the public sector indebtedness.
The answer is to utilize the financial potential and technological, technical and management experience and skills of the private sector through application of PPP models. From the financial point of view, to draw the private sector financial sources into the transportation projects, for the benefit of both sides – public and private sectors. Considering and assessing various sources of financing, we can see an optimal combination – a multi-source-financing, which contains:• EU Structural and Cohesion funds (based on co-financing principle) + Public sector financial participation (central and local government levels) + Involvement of private sector financial sources (Public-Private Partnerships – PPP, concessions).
The principal benefits of such PPP schemes are: • public sector gains access to a range of private sector skills to provide a more efficient and cost-effective service; • private sector takes on a range of risks that under traditional public procurement would be borne by the public sector; while it gets a secure “job” for years, maybe decades • greater efficiency can be generated where a single party is responsible for design, construction, management and financing as a part of an integrated package.
Can we utilise the EU co-financing directly together with private financing (PPP) in the concrete infrastructural project? Generally it is not excluded, but there are more questions to be solved:
A “public” or “private” share of EU fund support for a PPP? (the latter discriminates the project vis-à-vis purely public investment)
Clear solution of Special Purpose Vehicle: • What accounting and tax regimes can be used? Public or private? (When repaying private investment, public bodies in fact pay private taxes enhanced by a complex interest rate…) • What treatment with unique infrastructure in case of bankruptcy? How to assess public aid in case of a PPP?
Stakeholders in PPP projects need to see EU legislation clarified to provide legal certainty, and a clearer insight into the real Value for Money for both partners.
What is the current situation in the Czech Republic? Can we apply the principles of PPP to our infrastructural transportation projects?
The answer is “YES”.
Czechia possesses a sufficient institutional and regulatory framework: • Ministry of Regional Development (Legislature) • Ministry of Finance (Regulator) • Office for Protection of Competition (Supervision of Tenders) • PPP Centrum (Methodology, preparation and support of PPP projects) • Association for PPP – one of the largest in Europe – on the private side (centre of PPP best private practice).• Sectoral Ministries (incl. Ministry of Transport) • Regions & Municipalities
Legislation in force in the CR: • The Act No. 139/2006 Coll. on Concession Contracts and Concession Procedures (Concessions Act) • The Act No. 137/2006 Coll. on Public Contracts
The Czech Ministry of Transport prepared a solid pipeline of potential PPP transportation projects. The most advanced of them are:
D3 motorway section Tábor – Boßilec (Southern Bohemia).
AIRCON Project
General Problems of PPP Concept in Transport: • Efficient protection of public interest, • Transparent and sustainable structure of PPP and clear balance of public payments/repayment, • Clear conditions of service quality, claims, sanctions for non-compliance etc, • Functional dispute prevention and resolution, conditions for contract update, for termination of partnership etc, • Demand and return conditions of a PPP project must be always impartially and independently verified!• PPP for services (without private investment) are possible almost everywhere, only efficiency of solution matters!