Garrigues Presentation - CG/LA's North American Leadership Forum - NOV. 2009

8/14/2019 Garrigues Presentation - CG/LA's North American Leadership Forum - NOV. 2009

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THE SPANISH PUBLIC-PRIVATE

PARTNERSHIP MODEL

Alfredo Fernndez Rancao

Washington, September 22, 2009


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Public authorities can currently choose to go down two routes to execute major

infrastructure projects:

The budgetary route, i.e., using revenues raised from collecting taxes paid by citizens.

The nonbudgetary route, which entails using existing capital in the financial sector coming fromprivate sector investment.

The latter route, used by public authorities to take advantage of the experience and know-how of private sector firms specializing in the construction and operation of publicinfrastructure projects, and to try to comply with the legal constraints on public debt,requires there to be sufficient private sector confidence: only a model that is safe andreliable is a bankable model.

The ability to give the necessary reassurance to the private sector depends, in my opinion,on a set of factors:

The existence of a stable political framework that inspires confidence in the actions of the publicauthorities.

Introduction (I)


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The existence of a developed legal framework that guarantees that the actions of the publicauthorities are legally accountable and that the rights of the private sector are effective.

The existence of model contracts, the terms of which are all technically, legally and financiallywell-defined.

Flexibility to limit the contractors risk in two ways:

First, the possibility of devising means of maintaining the economic and financial balanceof the contract in situations such as the following:

Where the decisions of the contracting authority impact the contract directly.

Where the decisions of the contracting authority or of other public authorities do not relate

directly to the contract, but affect it nonetheless.

Cases offorce majeure.

Introduction (II)


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Second, the possibility of predicting with certainty the potential consequences of the contractingauthoritys decisions for the private contractor, such as early termination of the contract, the elimination ofcontractor-managed services, etc.

Together with the relevant provisions in the contract to regulate the consequences of such situations, inpractice public contributions to the private contractor can be established in Spain to ensure the economic andfinancial balance of the contract, such as:

Subsidies: for investment (for instance for job creation), or for operations (subsidy for part of the price ofthe rates to be charged to future users of the infrastructure).

Returnable advance payments, guarantees, performance bonds, exchange rate hedges, or capitalcontributions.

Structurally subordinated loans, the repayment of which can be deferred until a certain amount of thecommercial debt has been repaid.

Secondary guarantees to ensure a certain level of revenues for the private partner.

Termination clauses, which enable the private operator to transfer the project to the public authority and

recoup its investment plus a specific return if infrastructure use does not reach projected levels.Contribution of land, buildings, facilities, etc.

Introduction (III)


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The simultaneous coexistence of this factors gives the private sector in Spain anattractive incentive to work together with the public sector in the execution of majorprojects.

In Europe, the challenge is to achieve sufficient transfer of risk in order to avoid legalconstraints on public debt without reducing the attractiveness of the transaction in themarket.

Having reached this point, the flexibility in operation of a public-private partnership willbasically depend on how developed each countrys public infrastructure and procurementlegislation is.

Unlike the model in English-speaking countries, the extensive regulation of public

procurement in Spain has meant that most of the elements of a contract (as much as 80%)are predetermined legislatively.

This avoids the need to have to negotiate all the elements of each contract andsignificantly cuts down on any delay caused by such negotiations in practice.

Introduction (IV)


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Public Sector Contracts Law (2007)

Special legislation about each kind of infrastructure (airports, railways, etc.)

Partial implementation of the Public Sector Contracts Law (2009)

General Administrative Tender Terms

Special Administrative Tender TermsSpecialTechnical Tender Specifications governing each contract

Contract

The level of negotiation in Spanish public procurementdepends on the award procedure chosen by the contractingauthority:

In open and restricted procedures, negotiation is notpermitted.

Negotiated and competitive dialog procedures do allowsome room for negotiation between the public andprivate sectors.

Introduction (V)


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In general, two different types of PPPs are used in Spain:

Institutional PPPs, which entail the creation of a specific entity, via:

Joint participation of public and private sector.

The taking up of stake by the private sector in a pre-existing public enterprise.

Purely contractual PPPs, which entail the conclusion of a contract between the parties. In turn,a distinction can be made between the different systems available:

Concession system: existence of a direct link between the private partner and the end user.The private partner delivers the service to citizens. Characterized by the operation of the

infrastructure.

Other contracts in which the partner executes and manages the infrastructure for the publicauthority owner, with no direct link to the user.

Types of PPPs used in Spain


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The following factors have led to the use of PPPs in Spain:

They enable the adequate infrastructure to be put in place, which has a positive impact onproductivity and economic growth, and improves the quality of life of citizens.

They help overcome budgetary control and public debt-related issues, driving the pace ofinvestment and encouraging effective and efficient public spending, ensuring the bestprice/quality ratio while maintaining public interest objectives.

They ensure the successful outcome of complex, sophisticated and lengthy legal transactionsand operations.

They entail a whole new definition of activities: the private partner tends to take a leading role inthe different stages of the project, while the public authority assumes, essentially, controlfunctions.

The distribution of activities between the partners ensures an adequate distribution of riskbetween the private sector and the project developer (public authority).

Reasons why PPPs are used in Spain


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The Treaty on European Union introduced the principle of budgetary balance as a basic criterion of economic policy.

This principle means that the ability of the public sector in the Member States to borrow money is limited.

To ensure compliance with this constraint, at EU level the European System of National and Regional Accounts in theCommunity(ESA 95) has been developed as an instrument for calculating the level of domestic debt in the Member States.

Under the ESA 95, not all transactions entailing public debt affect the budgetary stability of the Member States [i.e. theinvestments made by institutional public market entities (AENA, ADIF, Puerto del Estado)], but rather only those carried outby certain public sector entities.

Where the indebtedness of a public sector entity affects the deficit of the Member State in question, an infrastructure projectcan only be executed if the risks are transferred appropriately to the private sector.

If there is no transfer of risk, it might even become impossible to execute the infrastructure project, since budgetary stabilityrequirements and the legal limits on public debt would not be met.

(As I have told before, the challenge is to achieve sufficient transfer of risk in order to avoid legal constrains on public debtwithout reducing the attractiveness of the transactions in the market.)

Contribution by PPPs to meeting budgetarystability objectives


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The limit on public borrowing has been precisely one of the main drivers for the expansionof PPPs in Europe, albeit not the only one.

PPPs allow risks to be transferred to the private sector and, therefore, the limits onindebtedness, to which certain public sector entities are subject, to be complied with.

At EU level, a distinction is drawn between three general categories of risk:

Construction risk (delays in handover of infrastructure, nonfulfillment of contractually stipulatedcriteria, additional costs possibly incurred, technical defects, and adverse external effects).

Demand risk (variation in demand, regardless of the conduct of the private partner, as aconsequence of the economic cycle, new market trends, competition, etc.).

Availability risk (failure to deliver volume agreed on in the contract and noncompliance withpredetermined quality standards).

Transfer of risk to the private sector (I)


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The Statistical Office of the European Communities (EUROSTAT) takes the view that assetslinked to a public-private initiative should not be considered when calculating public debtif two conditions are met:

The private partner must bear the construction risk.

The private partner must also bear the availability risk or the demand risk.

The construction risk may be transferred to the private partner by attributing the

consequences of the following factors:

Delays in completion and subsequent handover of the project where they are for reasonsattributable to the private partner.

Noncompliance with the project technical specifications.

Increase in costs during construction of the infrastructure.

Damage to third parties during the execution of the project.

Any technical defect or adverse external effect that may arise during the contract term.

Transfer of risk to the private sector (II)


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To transfer either of the other two risks (demand and availability) to the private partner, the methods

used in Spain are based on private partner remuneration mechanisms: (i) demand risk transfer-based mechanisms, and (ii) availability risk transfer-based mechanisms.

The demand risk transfer-based mechanisms are as follows:

Conventional toll:

The private user of the infrastructure pays the private enterprise directly according to the rates set bythe developer (public authority).

To ensure the viability of the project, it is advisable to insert into the contract maximum and minimumperformance thresholds based on which enterprises must submit their economic bids to perform thecontract.

Shadow toll: the public authority pays the private partner according to the volume of use by citizens of theinfrastructure and pursuant to certain predetermined rates.

Operation of commercial or ancillary areas by the private partner.

Transfer of risk to the private sector (III)


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Availability risk transfer-based mechanisms are characterized by making the privatepartners remuneration dependent on the degree of compliance with the quality standards

predetermined by the authority developing the infrastructure:

Deductions applicable for noncompliance, according to the seriousness and duration of thenoncompliance in question.

Examples of noncompliance as regards availability:

TYPES OF NONCOMPLIANCE DEDUCTION

Noncompliance that renders inoperative and prevents the use of an entire functional area of theproject

100 %

Noncompliance that renders inoperative and prevents the use of part of a functional area of theproject

70 %

Noncompliance that seriously affects operability but does not prevent the use of all or part of afunctional area of the project

50 %

Noncompliance that moderately affects operability but does not prevent the use of all or part of afunctional area of the project

30 %

Noncompliance that slightly affects operability but does not prevent the use of all or part of afunctional area of the project

10 %

Transfer of risk to the private sector (IV)


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Deductions for defects in the quality of the services can be set in proportion to the degree ofcompliance with the quality indicators established by the authority, as in the following example:

% COMPLIANCE WITH EACH INDICATOR DEDUCTION

100 % - 90 % 0 %

90 % - 80 % 5 %

80 % - 70 % 10 %

70 % - 60 % 15 %

60 % - 50 % 20 %

50 % - 40 % 30 %

40 % - 30 % 55 %

30 % - 20 % 70 %

20 % - 10 % 85 %

10 % - 0 % 100 %

Transfer of risk to the private sector (V)


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PPPs in Spain: some data of interest (I)

In recent two decades, Spain has enjoyed a significant boom in investment and, through this, Spanishcompanies have developed a high profile expertise in the construction, renewal, maintenance anoperation of public infrastructure (airports, ports, motorways, high-speed rail, subway, hospitals, etc.).

Public infrastructure investment (US$ million) in concessions in the last five years in Spain, according toSEOPAN (Spains construction industry observatory):

TYPE OF INFRASTRUCTURE 2003 2004 2005 2006 2007 2008

PORTS 146,1 426,90 10,9

ROADS

NEW INFRASTRUCTURE 3.388 378,1 2.382,7 609,2 3.975 702,2

MAINTENANCE 2.208,9 1.017,6 8.305,9

RAIL 2.106,7

AIRPORTS 164,9 270,1

WATER-RELATED 306,6 17,5

DESALINATION 290,5 52,4 1.382,6 221,9

URBAN MOBILITY 151,8 616,9 1.378,2 530,4 3.635,9

PARKING FACILITIES 48,1 114,1 281,7 414,6 125,4 296,3

HEALTHCARE 629,2 2.076,5 70,8 99,4

SOCIAL SERVICES 1.156,4 38,8 387,6 13,2 88,4 31,3

OTHER 1.007,6 536,8 2.841,1 2.230,5 795,7 2.572,5

TOTAL 8.308,3 4.057,7 10.083,4 6.615,9 14.131 7.737,4


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The 2005-2020 Strategic Plan for Infrastructure and Transportation in Spain envisages that

at least 40.5 % of new project funding will come from PPPs:

TYPE OF INVESTMENT

FINANCING

% TOTAL INVESTMENTBUDGET PPP

ROADS 75 % 25 % 26,81 %

RAIL 81,4 % 18,6 % 48,00 %

AIRPORTS 2,2 % 97,8 % 6,60 %

PORTS 9,7 % 90,3 % 9,72 %

OTHER PROJECTS 27,7 % 72,3 % 8,87 %

TOTAL 59,5 % 40,5 % 100 %

PPPs in Spain: some data of interest (II)


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RAIL INFRAESTRUCTURE

1980s Arrival of high-speed rail, 1992

Examples of projects in Spain


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High-speed train (AVE), 2009



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Santa Justa AVE Station, Sevilla, 1991



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Zaragoza AVE Station, 2003



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Antequera AVE Station, 2006 Mlaga AVE Station, 2006



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Spanish high-speed rail (AVE) network, 2009


In serviceUnder constructionIn developmentUnder study

The aim of the Ministry ofDevelopment is for Spainto have an AVE networkspanning 2.230 km in2010.

This would make Spainthe leading countryworldwide in terms ofkilometers of high-speed

rail line, ahead of Franceor Japan, whose networksare very developed.

The 2005-2020 StrategicPlan for Infrastructure andTransportation in Spaincontemplates aninvestment of $ 182.500million (48 % of the total)

for expansion of the AVEnetwork.

By 2020, 90 % of Spanishcitizens will live within 50km of an AVE station, andwill be able to use anetwork of 10.000 km ofhigh-speed lines.

Characteristics of the SpanishAVE network:


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SUBWAY AND LIGHT TRAIN

Madrid Subway, 1970s



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Madrid Subway, 2009


E l f j i S i


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Alameda de Osuna Station, Madrid, 2006 Chamartn Interchanger, Madrid, 2007


E l f j t i S i


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San Francisco Station, Madrid, 2006 Olympic Stadium Station, Madrid, 2007


E l f j t i S i


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Madrid Ligth Railway




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Madrid railway evolution (kilometres)

Some data of interest:

Between 1999 and 2008, theCommunity of Madrid, through themanaging agency MINTRAinfrastructure, has invested $12.244,5 mill. in transportinfrastructures (that are operated bythe company METRO DE MADRID).

The planned investment for theperiod 2007-2011 is $ 8.120,84 mill.

Approximately 15,7 % of thisinvestment will befinanced through the budget, and84,3 % from nonbudgetary sources.


2008: 321,2 Km.



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Sarriko Subway Station, Bilbao, 1995




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Moyua Subway Station, Bilbao, 1995




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ROAD INFRAESTRUCTURE

New Madrid radial highways (2004)

R2 Motorway




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R3 Motorway R4 Motorway




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R5 Motorway

Radial 2 Radial 3 Radial 4 Radial 5 Total

Length (Km) 61 33,9 87,99 27,5 210,39

Investment (USMillion $)

730 430,7 868,7 351,8 2.381,2




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First Generation Main Road Conditioning

Madrid-La Corua Road, 1980s Madrid-La Corua Motorway, 2008




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Madrid-Andaluca Road, 1980s Madrid-Andaluca Motorway, 2008




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Los Viedos Motorway, 2005

p p j p



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Evolution of the Spanish road network (km)

p p j p

Years TotalState roads Regional roads Underregional roads

High capacityroads

Other roads High capacityroads

Other roads High capacityroads

Other roads

1992 158.324 5.443 15.862 1.316 70.245 229 65.229

1993 159.630 5.714 15.862 1.456 70.626 234 65.738

1994 162.196 6.002 15.534 1.489 71.076 257 66.838

1995 162.617 6.274 15.652 1.572 70.981 287 66.851

1996 162.100 6.534 16.597 1.667 70.499 299 66.504

1997 162.795 6.919 16.478 1.821 70.623 323 66.631

1998 163.273 7.423 16.419 1.664 68.910 562 68.295

1999 163.769 7.657 16.467 2.032 69.048 617 67.948

2000 163.557 7.656 16.449 2.088 68.749 699 67.916

2001 166.799 8.082 16.376 2.362 68.492 708 67.779

2002 164.139 8.368 16.273 2.245 67.214 793 69.246

2003 164.584 8.794 16.063 2.361 67.909 854 68.603

2004 164.152 9.164 15.991 2.407 68.094 873 68.623

2005 165.646 9.465 15.950 2.746 68.009 945 68.531

2006 166.339 10.081 15.723 2.812 68.183 979 68.561



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AIRPORT INFRAESTRUCTURE

Madrid-Barajas Airport, 1980s New Madrid-Barajas Terminal 4, 2006

p p j p

Budget: $ 9.030 mill.



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New Madrid-Barajas Terminal 4, 2006



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Sondika Airport, Bilbao, 2001



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Tenerife Norte Airport, 2008

In 2006, the Ministry of Development decided to invest $ 26.280 mill. for the expansion and improvement of the 48 Spanishairports network.



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PORT INFRAESTRUCTURE 2009

Expansion project of the Port of Gijn

2005

The expansion project:

Construction of a new breakwater that, starting from Cape Torres and running for a total length of 3.834 meters alongthree differently structured alignments, was to form a wharf containing 140 Ha of sheltered waters.

Construction of a quay located to the north of the wharf that measured 1.250 meters in length with draughts ranging

between 23 and 27 meters and a width of over 400 m to allow for the simultaneous berthing of three bulk carriers of230.000 DWT and 20 meters of draught.

Backfill protection, with a length of 1.732 meters to give a total surface area of 145 Ha with land entirely reclaimed fromthe sea.

The new dry bulk terminal to be established in these facilities will have an unload capacity of over 25 million tons and a60 Ha storage area to allow for the storing of up to 2 million tons of iron ore and coal.

Budget: 845.691.860 $



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Expansion project of the Port of A Corua (Punta Langosteira)

The expansion project: Building of a floating dock of

3.360 meters long, a dock of900 lineal meters (with adraught of 16-22 meters), andthe building of an open areaand its land accesses byconnecting the road to theindustrial area of Sabonnearby.

Seawall of prefabricatedconcrete drawers, located to230 meters since the beginningof the jetty head and parallel toit, 390,90 meters long.

The final dock will have asurface of 230 hectares ofsheltered water and 143hectares de port yard (91 ofthem will be land that has beenreclaimed from the sea).

Budget: 626.632.573 $



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PUBLIC HEALTHCARE INFRAESTRUCTURE

New Puerta de Hierro-Majadahonda Hospital, 2009

Puerta de Hierro Hospital, 1990s



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Infanta Sofa Hospital, Madrid, 2008 Henares Hospital, 2008



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Infanta Elena Hospital, Madrid, 2008 Sureste Hospital, Madrid, 2008



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Infanta Cristina Hospital, Madrid, 2008 Tajo Hospital, Madrid, 2008



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Infanta Leonor Hospital, Madrid, 2008

In the Community of Madrid, between 2004 and 2007, have been built 8 new hospitals in Madrid:

2.000 new places for patients. 75 new operating rooms. 749 new doctors offices.



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Torrevieja Hospital, Alicante, 2006

Investment: $ 189,8 mill.



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WASTE TREATMENT INFRASTRUCTURE

Valdemingmez BiomethanationPlant, Madrid, 2009

Valdemingmez Biomethanation Plant:

Can generate each year 34 million cubicmeters of biogas that, once processed,will be sufficient to move 405 buses on

natural gas, supply electricity to 20.500houses or 4% of the entire industrycapital.

Can remove up to 369.000 tons oforganic matter (60 % of this wastegenerated in the city of Madrid) andproduce 390.000 megawatts ofrenewable energy.

Investment: $ 116 mill.



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Zabalgarbi Plant, Bilbao, 2004

Zabalgarbi Plant:

Can incinerate 242.000 tonnes ofwaste per year.

Can generate 586.6 million kWh

per year, equivalent to domesticand commercial consumption ofabout 300.000 people. Is expectedto further increase powerproduction to 760 million KWh.

Investment: $ 224 mill.



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JUSTICE INFRAESTRUCTURE

Justice City, Valencia, 2003 Justice City, Mlaga, 2007



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SPORT INFRAESTRUCTURE

The Magic Box, Madrid, 2009 New Marina, Valencia, 2007



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CULTURAL INFRAESTRUCTURE

Alfredo Kraus Auditorium, 1997 Canal Theater, Madrid, 2008



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Fair of Madrid, 2002



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City of Arts and Sciences, Valencia, 2002 Guggenheim Museum, Bilbao, 1997


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Documents

Garrigues Presentation - CG/LA's North American Leadership Forum - NOV. 2009