Thomas Maier and Matthew Jordan-Tank on non-conventional PPPs | EBRD | Video
World Finance interviews Thomas Maier and Matthew Jordan-Tank from EBRD about non-conventional PPPs
Providing project financing for banks, industries and businesses, the European Bank for Reconstruction and Development (EBRD) invests in projects that could not attract finance on similar terms, paving the way for much needed development. Thomas Maier and Matthew Jordan-Tank talks about non-conventional PPPs, public service contracts and what makes projects credit-worthy.
World Finance: Well Thomas, let’s start with non-conventional PPPs. How do you structure these?
Thomas Maier: So, as you know, all our approaches are in sometimes difficult emerging markets, and so for us the challenge is not so much to come up with non-conventional structure than to apply best practice that we have seen elsewhere in emerging markets and mature markets, and in reality there are three elements that make a good PPP project.
We as investors look for a stable regulatory and legal environment
One is that the project itself traces an underlying demand that is long term, stable, and goes beyond political cycles. We as investors look for a stable regulatory and legal environment. And thirdly, the underlying cashflow of a project, and that is a topic we are going to discuss here in more detail, has to be stable, predictable and solid, so that both financiers and operators come in.
World Finance: And what role do institutional investors play in PPPs and project finance?
Thomas Maier: Historically, institutional investors were not very active in our region, but recently this seems to be changing. For example, last year we financed the R1 toll motorway in Slovakia, or rather refinanced that transaction, and we could attract a fair number of European institutional investors, such as insurance companies and pension funds.
Altogether about 1.2bn was raised in this market, with EBRD and KFW as anchor investors, so we do see that there is an increased interest by institutional investors, because emerging markets provide an interesting yield for these investors, provided the transactions themselves are well structured.
World Finance: Matthew, moving on to the regulatory side of things now, and how is urban transport as a sub-sector controlled?
Matthew Jordan-Tank: As you know, urban transport involves much more than just public transport. It’s also about users who drive private cars, it’s other users who are pedestrians, non-motorised transport as well. So it’s a complex environment on the street. What you’re really trying to do at the end of the day is provide a balanced approach to all those different modes of transport. So for very very large cities, what we do and what we’ve seen is that there’s a need to establish what’s known as a transport regulator, a transport agency or authority.
We’re here in London and TFL is a good example
We’re here in London and TFL is a good example of that for a very large city. In the smaller cities you can do this kind of good regulation with a transport department, but in both cases what you need is very well trained, well prepared professionals who understand the dynamics of regulatory environments in urban transport. And one of the main things we do is, with our development side of EBRD, is to really do capacity building institutional strengthening for our counterparts.
World Finance: How do public service contracts fit into all of this?
Matthew Jordan-Tank: What a PSC essentially does is establishes a two-way relationship in a balanced environment. On the one hand you have the public, the owner of the operator who will be essentially providing a service. So you’ve got an owner and a service provider and this PSC is a long term, typically a 10 year contract, that governs that relationship. What you’re trying to do in the PSC is establish the rules and regulations around the operation so that, in exchange for providing a good high quality service, the operators were remunerated sufficiently, and that’s the way to achieve sustainability, by means of this PSC instrument.
World Finance: What is the underlying revenue stream for the public sector, and how do you incorporate performance based subsidies?
Matthew Jordan-Tank: Performance based payments, really, these are public sector payments, known as subsidies typically, they are performance based in the sense that they are defined in the PSC in the formula. The formula essentially has two sources of revenue, one is from users and this is to begin with the basis of all good sustainable transportation environments. It’s when users are willing to pay a healthy amount for the service that they’re receiving.
That’s the user-based principle. The other side is, when there is a financial gap between the total cost of delivering the service and what is actually received from users, that’s where the public sector comes in with this sort of performance based subsidy payment, and that’s all defined in the PSC formula.
World Finance: And Thomas, finally, what makes a project credit-worthy?
Thomas Maier: There are additional hurdles that a project needs to meet when it is an emerging market, simply because the track record of the market itself may not be as complete as in the mature market, and the legal and regulatory framework may be less ideal than it is in certain EU countries. This is where we are coming in, as well, with additional services. For example, we help many of our public sector clients in structuring projects to a level where they become attractive to the market.
There are additional hurdles that a project needs to meet when it is an emerging market
Our own investment is important for many investors and operators, because our non performing loan ratio and infrastructure in particular is very low, which means that we generally tend to look and seek the right partners and the right projects. And lastly, we can provide local currency loans and investments, which is extremely important in infrastructure space because many of these projects only generate local currency, and therefore providing local currency financing hedges against devaluation risk.
World Finance: Thomas, Matthew, thank you.
All: Thank you.