Asset-Based Financing for Transport Projects

Chris CookPartnerships Consulting LLP

What is Asset-Based Finance?

• Ownership of assets and their revenue streams

• Legal “wrapper” around assets and revenues – Limited Liability Company– Trust– “Open Corporate” Limited Liability Partnership

What is Deficit-based Finance?

• Interest-bearing (from Credit Institutions)– “Asset-backed”/ Secured by a claim on assets

(mortgage or “charge”)– unsecured

• Non interest-bearing (from suppliers or staff)

Asset-Based Finance – Companies

– Types• Limited by Guarantee

• Limited by Shares– Private

– Public

– GM eg IPS, CIC

– Issues• Conflicts – ”shareholder value” and CSR

• Management – the Principal/Agency problem

Asset-Based Finance – Trusts

– Examples • Canadian Income/ Royalty Trusts • Macquarie Bank business model

– Common Law – judge made– Issues

• Risk Aversion• Management • Taxation• Legal complexity and cost

Asset-Based Finance - LLPs

• Q. When is a partnership not a partnership?

• A. When it’s a UK Limited Liability Partnership (“LLP”)

• Q. What is it if it’s not a partnership?

• A. A corporate body: with limited liability: and………er, that’s it!

Why an “Open” Corporate?

• Open to any “stakeholder” to be a Member, as long as they subscribe to the “Member Agreement”.

• A legal “wrapper” – like a “trust”, but without the drawbacks - for any assets or revenues anywhere in the world.

• Tax transparent.

Introducing the “Capital Partnership”

• “Capital User” Member• “Capital Provider” Investor Member• Jointly acquire a productive asset• “Capital Rental” - user pays Investor a

revenue share in Money (or “Money’s Worth”) for as long as Capital is used

• Rental paid before due date is Investment• Outcome “Co-ownership”

Hilton Deal 2002

Capital Partnership LLP10 UK Hotels

Revenues27yr term

Hilton Group“Capital User”

Consortium LLP “Capital Provider”

£350m

Bank PropertyDeveloper

HotelSpecialist

% of Revenues% of Revenues

%%%

Community Transport Partnership

LLP

Investors

Users

Capital Rental

Operators

% %

TrusteeOwnership

Community Transport Partnership

• “Trustee” Member

• “Investor” Member

• “Developer/Operator” Member

• “Occupier” Member

Example 1 – Eurotunnel

• Divide £8 bn Capital (debt and equity) into billionths/ ”shares” at £8.00 each

• Allocate (say) 25% of Eurotunnel revenues to “ Capital Rental”

• Initial Capital Rental £150m = 1.875%• Each billionth then carries one quarter

billionth of Eurotunnel revenues, initially 1.875%

Example 2 – Merseytram

• Current Plan – increase Mersey Tunnel deficit-based finance by £40m

• Alternative Plan – refinance Mersey Tunnel with £120m asset-based finance

• 10 million “ shares” at £12.00• initial Capital Rental of 3% = £3.6m or approx 10% of

revenues• each share carries one 100 millionth of tunnel revenues • Financing costs reduced overall despite increase in Capital

Investment Proposition

• Reasonable long-term return

• Secure –based upon “ Co-ownership” of asset

• Potential for growth with limited downside

• Islamically sound

Outcomes

• “Co-ownership” between financier and financed

• New long term savings/pension asset class

• Local investment in local infrastructure?

• Lower cost of capital than deficit-based finance