“A Case Study on Project Risks and Risk Mitigation”

North Luzon Expressway Project(A Public-Private Partnership in the Philippines)

Amol AzadMBA (Marketing)

Project Key features

• The concession is held by Manila North Tollways Corporation (MNTC),the project company, which is a joint venture of several national and international companies.

• Involves rebuilding and modernization of the NLE tollway system according to government required standards and levels of service.

• Operation of the tollway. • Maintenance of the pavement and the toll collection system. • Returning the tollway system to government at no cost after

concession period ends.• The corporation was required to raise finance on its own

without government guarantee.

Key Issues

• MNTC will put up the money (invest and borrow) on its own without

government financial guarantee.• MNTC will build the tollway and take full construction risk.• MNTC will operate, maintain and manage the tollway for 30 years (or until

31 December 2030) in accordance with government standards with no funding support from the Government.

• The Project roads are owned by the Grantor subject to the rights and privileges of MNTC to construct, operate and maintain the tollway system.

• Government will not take market risk. If revenues are not sufficient, government will not bail out MNTC.

• To recover the investment, MNTC will collect tolls through the authorized toll rates and the approved adjustment formula.

• Multilateral & Bilateral Financial Institutions are playing a key role.

Risk Mitigation in the NORTH LUZON EXPRESSWAY PROJECT

Economic Risk Mitigation: The Government of Philippines, did not participate in funding, it was mitigated via

financing through Multilateral Agencies such as IFC, MIGA and of course ADB. Construction Risk Mitigation:• ‘Delay In Service’ Insurance• Overrun Undertaking• Deficiency/Shortfall Agreement• Completion Undertaking•

Risk Mitigation

Traffic Risk Mitigation:• Existing traffic with capacity reached on certain segments• More than 20 years history as tolled road• No alternative road • Conservative forecasts, robust cash flows

Toll rate increases Mitigation:• Automatic approval under the STOA• Toll rates to be revised every two years• Grantor compensates in case toll rates not increased• Projected tolls lower than in comparable roads

Risk Mitigation

Currency devaluation Mitigation:• Significant pass-through in the application of the toll

adjustment formula• Starting toll rate is fully hedged• Cash flow strong enough to take care of sensitivities O&M Risks Mitigation: • O&M expertise from Transroute via technical assistance• agreement• Regular / periodic maintenance planned• Bonus / penalties to minimize leakages