TRIB 01 n20!4!36 Project Financing

ASSOCIATION INTERNATIONALE DES TRAVAUX EN SOUTERRAIN
AITES
ITA
INTERNATIONAL TUNNELLING ASSOCIATION
Towards an improved use of underground Space
In Consultative Status, Category II with the United Nations Economic and Social Council http://www.ita-aites.org
Topic
PROJECT FINANCING Title
Risk assessment on Project Financing
Author
M. dal Lago, J. Huse, E. Schneider, G. Lombardi, G. Goggi, E. Nowotny, M. Rivoire, MIG
published
in "Tribune", Nr. 20, pp. 4 - 36, Year 2001 by ITA - AITES, www.ita-aites.org Working Group: TF - "Task Force" Open Session, Seminar, Workshop: Open Session 2001, Milano: "Project Financing" Others:
Meetings
Abstract: Rsum:
* The Roles of the Public and Private Sector, M. dal Lago * Introduction to the Legal Aspects of Project Financing, J. Huse * Dealing with geological Risk in Bot Contracts, E. Schneider * Geotechnical Risks for Project Financing of Tunnels in Non-Urban Areas, G. Lombardi * Economical Feasibility and Project Financing in Urban Areas, G. Goggi * Trans-European Transport Neworks: a Political and Financial Challenge, E. Nowotny, Vice-President of the EIB * Financing the Lyon-Turin Link or the Gradual Revelation of a Firm Conviction, M. Rivoire * Financing of the Eastern Distributor Motorway in Sydney, MIG.
Remarks: Contents:
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RISK ASSESSMENT ON PROJECT FINANCING

INTRODUCTION
uring the World Tunnel Congress held in Milan last June, the ITA Open Session had as topic Risk assessment for project financing. For the first time ITA decided to publish in Tribune the papers presented at this occasion. The five speakers treated the subject from different point of views, but their conclusions are converging. M . S e rgio Dal Lago reminded that, considering the increasingly small possibilities of public financing of infrastructures, it is becoming more and more indispensable to call on private financing. He considers that this is a good solution, but that it requires clear and precise rules to define the basic and complementary roles of the public and private sectors. Joe Huse, in his talk entitled I n t roduction to the Legal Aspects of Pro j e c t Financing, first gave a brief definition of project financing. Then, he described the participants in a typical project financing and the different phases of such a project. F i n a l l y, he reviewed briefly the main project contracts and their contents. These contracts include the concession agreement, the construction agreement, the shareholders agreement, the operation and maintenance agreement, supply and off-take agreements and other agreements. After having evoked the conditions of the use of the BOT contracts for infrastructures, Mr Schneider presented a model named KEFIR , imagined and developed by Mr.Spiegl at the faculty of Innsbruck. This model, which applies to underground works realized within the framework of turnkey contracts, is aiming to increase the use of BOT contracts in the field of hydroelectric facilities. By allowing a better distribution of risks, it favors innovative propositions and stimulates competition among the tenderers. Mr. Giovanni Lombardi reminded that physical as well as economical circumstances limit the amount of investigations and analysis preceding the construction of an underground work. The knowledge of the ground which will be actually met during the construction is so very often limited. The longer the tunnel, the greater its
depth, the larger its section and the more complex its environment ; the more vague and fuzzy is the available data.The establishment of relevant contractual clauses on such fuzzy data sometimes leads to dramatic situations. To illustrate the problems of project financing in urban areas, M.Goggi refered to the example of the project of the underground ring road Bastioni in Milan, with a length of about 12km. He underlined its importance as regards traffic, town planning and environment for the city of Milan. After presenting the main functional and technical characteristics of this project, he underlined that, considering the very strong demand for mobility, the financial profitability of this operation was ensured, which made it possible to call on project financing. ollowing the pre s e n t a tions, a long and lively discussion took place with Mr. Colin Kirkland (UK), John Reilly (USA) and Adolfo Balesteri (Italy) and the speakers. n this issue ITA is publishing three other papers related to the subject. The first one is presented by the Vice-President of the European Investment Bank, on the political and financial challenge of financing Trans European networks. The second one is related to the project for a new rail link between Lyon in France and Turin in Italy and attempts to explain the view of the regional promoters who had to demonstrate to the governments the economical feasibility of such a project with the implication of private and public financing. The third one is related to the financing of a motorway in Sydney and explains the banks point of view and how a project of an amount of nearly 500 US$ can be financed. ou may be surprised by the cover chosen to illustrate this issue. It is an illustration of the boring of the railway tunnel Tunnel du Mont-Cenis between France and Italy in the 1860s. This tunnel is one of the first public-private partnerships for the construction of a tunnel, between the Sarde railway private company and the Kingdom of Piemont
F I
TRIBUNE n20 - ITA-AITES - December 2001
AITES
ITA
Topic
The Roles of the Public and Private Sector
Author
M. dal Lago
published
in "Tribune", Nr. 20, pp. 5 - 9, Year 2001 by ITA - AITES, www.ita-aites.org Working Group: TF - "Task Force" Open Session, Seminar, Workshop: Open Session 2001, Milano: "Project Financing" Others: Abstract: Rsum:
Compte tenu des possibilits dcroissantes de financement public des infrastructures, il devient de plus en plus indispensable de faire appel au financement priv. Cette solution est bonne, mais elle ncessite des rgles claires et prcises pour dfinir les rles essentiels et complmentaires des secteurs publics et privs.
Meetings
Remarks:
1 THE ROLES OF THE PUBLIC AND PRIVATE SECTOR

Compte tenu des possibilits dcroissantes de financement public des infrastructures, il devient de plus en plus indispensable de faire appel au financement priv. Cette solution est bonne, mais elle ncessite des rgles claires et prcises pour dfinir les rles essentiels et complmentaires des secteurs publics et privs.
M. Dal Lago
The world is witnessing to an ever-increasing need for infrastructures, the constant adjustment of the existing ones and an increasing these infrastructures to complement one another. This is an essential requisite for development, but it requires ever-increasing financial resources which the public administrations do not have at their disposal since they largely exceed any fiscal revenue, or any physiological indebtedness capacity. As a matter of fact, the experience of the last few years showed that within the sector of large infrastructures it is not possible to rely upon considerable public financing, and it has become increasingly obvious that the situation is unlikely to significantly change in the future, given the European restrictions imposed at theTreaty of Maastricht on national budgets. Nowadays the relaunching of investments in the public services sector can and must take place by turning to the capital market whenever possible. The only solution for anybody who wants to intervene in the sector can is aim at works capable of autofinancing or, otherwise, at works considered as a public utility, towards which the public administrations are willing, for the direct and/or direct benefits received, to pay the fee of a shadow-traffic, or to acknowledge a rate. Hence, the need to involve external financial resources which are made available once a project is duly renumerated and guaranteed even if there is a measured and well considered valuation and risk sharing. Both the South American system, which witnessed in the last decade an extraordinary wave of privatisation in the field of gas supply, production and transport of hydro-electrical and thermoelectrical power, and the English system (PFI & PFP) for the completion of hospital infrastructures, prisons, airports, motorways, had considerable recourse to private capital. The English choice is based on the opinion that in a post assistance state the citizens, in return for the share of taxes they pay, are more interested in the supply of public services rather than the accumulation of fixed capitals. In other words they are interested in the availability of
beds in hospitals, safety of the prisons, practicability of the roads, quality and respect of the environment. Consequently, the Public Administration changes its role, becoming a collector of petitions, ratifies the priorities and concentrates its efforts in the identification of the services required to meet demands and challenges the private entrepreneurial class to rispost by proposing the supply of services with the best qualitytimes-price ratio. Ultimately, the public sector is transformed from owner of assets into purchaser of services, thus fully fitting into the market, so that the traditional categories of investments become outdated, sometimes obsolete and the distinction with the private sector fades away. By now, the system is running yet has to comply with the fundamental requirements, the first of which is essential, that is the need for a project. A project meets the requirements to be financed if necessary, when it is possible to value the cost-benefit ratio generated by the project and, accordingly, to acknowledge a price to be paid (fee), or, for the Public Administration, to aknowledge the benefits from certain advantages (decongestion, decrease of accidents and pollution, etc.), regarding its utilisation and the profitability by the users. The economic-financial feasibility of the project. The feasibility study must take into account all the factors intervening both during the construction period and during its management. It is necessary to start from the laws and regulations governing the sector the project refers to, motorways railways, airports or inter-ports, and the market, or in the case of the transports, a traffic study, its development, the fees, the possible seasonality or factors affecting the regularity thereof. The real project, i.e. the technical and technologic choices to carry out the work, so that the project makes as much headway as possible, at costs as certain as possible, consistent with the quality imposed by regulations and specifications, and with an effect on the environment as limited or as mitigated as possible. The investment cost is thus obtained. The investment value and a preliminary valuation concerning the distribution of the amount among own
means placed by the promoters as risk capital and the amount one intends to apply to the financial market, generate the first approach to the financial leverage, that is the leverage between capital and debt. In roadtype infrastructures experience shows that such a ratio can rarely be under 20% of own means and 80% of financing. Such ratio generally corresponds to 25% - 75%. The legal, contractual and financial structuring of the project that must guarantee that the risk be fairly shared out throughout the duration of the concession. Risk sharing is one of the fundamental factors of the possible success of a project. The Italian answer to this infrastructure financing method is represented by the so-called Merloni ter (Law no. 415 of 18.11.88) that implemented art. 37bis nonies to the outline law 11.2.94 no. 109 concerning Public Works. By this intervention, which is still subject to heated discussions at European level, the legislator has nevertheless made great progress in meeting the economic operators expectations, guaranteeing. Higher certainty and steadiness of the law and the relation between the administration and the private bodies interested in financing a work or a service, allow the introducion of two instruments which makes possible the use of the Project Financing technique. The first instrument is that of the Promoting Body, which is a private body, aspiring concessionaire which makes provisions to preliminarily identify and plan the public works to be carried out and to manage in Project Financing, and to submit to the Administration a proposal accompanied by a certified financial plan and adequate guarantees. If the Administration considers it to be of public interest, it will then place a tender base. The second instrument is represented by the bankability of the concessions of construction and management (both those at administrations initiative and those proposed by the promoting body). The bankability becomes apparent via the possibility to establish the project company (special purpose vehicle, SPV), and to provide guarantees to the potential financiers, among which the possibility of replacement with a new concessionaire (chosen by the financiers) in the event of non-performance of the original one. The introduction of such provisions, even though many normative points remained to be resolved and were only partially addressed by regulations published recently, allowed Italy to approach to the tes-
ted PFI Britannic system, while keeping elements of rigidity and formalism typical of the Italian administrative law. Special attention has to be paid to the contractual forms through which the concession relation becomes manifest. From the historical DBFO (Design, Build, Finance, Operate). To the most modern and popular BOT (Build, Operate, Transfer). BOOT (Build, Own, Operate & Transfer). LOT (Lease, Operate & Transfer). ROT (Rehabilitate, Operate & Transfer). It is plain that in any contractual model, the legal and financial structures and risk sharing - with consequent different financing cost and finally different services supplied must change. It is also plain that the private sector, warned, pandered to and cited by this New Deal, that is the construction of works and the repayment through the supply of services, is driven by a mainspring represented by the profit. The construction of the public works awarded with maximum mark-down prices, has reduced the Contractors margins to the verge of starvation, often with a boomerang effect for the Administrations that saw the business concerns fail, and had to complete the works with considerably extended deadlines and at inflated prices. Project Financing, if well carried out, should be an index of maximum financing and contractual transparency and fair profit for everyone. All the private bodies concerned are important and are bound to the rules that, once they got ready, become strict (the centrality of the contract in the project financing). The private Players of this game are essentially the following : the Sponsors (or Promoters according to Merloni ter) are therefore the promoting bodies or the partners of the project company (SPV) which becomes counterpart of the concession contract (that is the concessionaire). It is plain that the reputation, the reliability, the financial capacity and the experience of the sponsors lends credibility to the SPV. Financial Advisor is essentially the advisor who, through the collection and the processing of all the data concerning investment, management, feasibility study, engagements, revenue hypothesises, traffic flows, verifies and prearranges the so-called Bank Package, or the investment / financing proposal.
The Contractor is the General Contractor who is in charge of the carrying out of the work on GMP on T/K basis with general liability to : price, times, quality. He shall be in a position to guarantee with a proper P.B. his skills as contractor. It is plain that reputation, financial skills, technical skills and experience are essential. NOTE : here the price will not be too low because it must allow the certainty of the completion of the work. Therefore, as to the contractors, reference is still to be made to fair margins. The operator is the body who guarantees, through the use of the work and its correct maintenance, the supply of service and toll collections, rates or considerations to repay the cost of the work. Also in this case the operators reputation and experience are essential for project reliability. It has to be noted that it is advisable for both the Contractor and the Operator to join the Project Company with non-majority shareholdings, but with a shareholding of some account. The composition of the partners of the project company and the contribution of capital with respect to the global amount of the investment are two essential elements for the project's success. Also the Public Administration granting the concession can join the project company (in England the PFP, in Italy the Private / Public Company pursuant to Law 142), and this can considerably strengthen the Financial Appeal of the operation. The financing leverage for the financing of the project ultimately consists in a series of factors among which the ratio between the SPV capital and the requested financing is the most important. But such a ratio, as well as the cost of money, and consequently the fees, can be optimised through the different sharing of certain risks and/or the introduction of the covenants, that is the guarantees and collateral obligations suited to strengthen the contractual structure or to mitigate the global risk of the project. In order to better outline a Project Financing structure, I am hereby explaining you slide A. It is plain that the concession contract represents the mainspring of the whole project. It is likewise plain that the contract is generally divided into two essential phases : construction and management. In this kind of operation and for complex infrastructures, for example a motorway with more exits and entries, the project can be carried out in more subse-
quent phases, but every single phase must have its own income balance. While in the case of a toll overpass or tunnel, it is necessary that at the beginning of the works all the funds required to cover the investment are paid-up or guaranteed. During the construction phase the main risk is assured by the General Contractor who is bound through the issuance of the Performance Bond and adequate insurance coverage to complete the work according to the costs and the schedule provided for and with the adequate quality. During the exercise, the risks are borne by the Operator and the Market. In the case of a road or an overpass such risks can, for example, imply that the Operator is not able to guarantee short waiting times at the tollhouses during the rush hours, or to carry out a proper maintenance of the road surface etc., thus inducing the users to choose alternative routes. On the contrary, the market is represented by the traffic risk that is the main risk for infrastructures concerning transport. The traffic, that is the usership, pays a toll to use the infrastructure operated and managed by the operator. The toll constitutes the main proceeds of the concession and, consequently, the guarantee that such proceeds are sufficient to remunerate and repay the invested capitals and the maintenance and management expenses, is essential. We will now examine how the tolls can be Real (Pay tolls) or Virtual (Shadow tolls) or a mix of both. In the light of the foregoing and based on experience we can state that there is an important tendency of investors to invest in toll roads, considering different types of investors: banks, funds, investors in obligations, debt suppliers, investors in subordinated or mezzanine debts. The main attractions are : The considerable initial capital amount offers a significant well-paid and long-term investment opportunity. The assets are tangible and long-lasting. The high social value is interesting for the governments and galvanises the Governments support. On the other hand, the fundamental risks that worry the investors in toll roads are : the risk connected to the project development, permits suited to guarantee the carrying out of the route,
schedules and amounts of the expropriations, etc..., the risk connected to the construction, above all the one related to critical structures such as overpasses, tunnels etc..., the well-known traffic risk, the operative risk : survey structures, terms of payment, etc..., the risk connected to the life cycle : extraordinary repairs and costs thereof. Therefore a combination between contractual structure, financial plan and insurance programmes is able to manage most of the risks. But the traffic-related risk is by far the most delicate. One of the methods to mitigate or annul such a risk is represented by the virtual toll, that is a preliminary valuation of the traffic and the cost-benefit ratio of the ancillary situations for the benefit of the community, so that the Public Administration acknowledges to the concessionaire a toll for a prearranged hypothesis of traffic, in substance almost a minimum guaranteed rate. For example a road with a high rate of accidents, violent effects on the environment due to traffic congestion, overcrowding and pollution has been replaced by an expressway granted in concession wherein the users do not pay the toll, but the Municipality pays a rate deriving from minor social costs (health, environment, etc.) which attracts the investors since it transfers the traffic risk (i.e. the Market) to the redemption capacities of the Public Administration concerned. Nevertheless there are some contra-indications : If there is no obligation to pay, all the drivers tend to choose the new best route, thus creating a swift overcrowding and reducing the advantages. The taxpayer feels as if he is a financier of the drivers : loss of consent at political level. Is the budget able to manage a virtual toll situation? A government determined to support the virtual toll and to inform the taxpayers and the users is necessary. The optimum choice, in the case of uncertainty that the traffic risk is not identifiable, is represented by a mix of minimum guaranteed and controlled toll such as (for example) the one adopted in the Concesiones Gran Via of Santiago of Chile. The concession data are : An expectation range of traffic with a minimum guaranteed for 20 years suited to cover the capital and interest redemption equal to 75% of the total value of the investment (construction, investment costs, issuance, etc.).
Duration of the concession : 25 years. Period of grace: 5 years. Coverage ratio of the debt : 1.1. Leverage 75% debt 25% capital. Interest rate: 8.5% net in U.S. $. If the annual profits are less than the minimum guaranteed, the Government pays the difference. If the traffic lies within the expectation range, the concession operates regularly. If the traffic exceeds the expectation range ceiling, the profits deriving from the traffic in excess are 50% due to the concessionaire and 50% to the Government. This mechanism added to a Collar Swap, that is an exchange risk mitigation between the local currency and the foreign currency of the debt, allowed the financing of the work at an U.S. $ rate that is considerably competitive for a South American country. The leverage 75% debt 25% own means was adopted also by Bre.Be.Mi SpA, the Promoter of Raccordo Autostradale Diretto [Direct Motorway Junction] Milano-Brescia, which provides for a global investment equal to approximately 1,300 billions. RATING Since the infrastructures investments are considerable, often more and more investors, banks, funds, etc. must intervene in a single project and take only a share of the debt, whether it is main or subordinated (or mezzanine). Not always the single investors have time, will or resources to carry out a complete. Due Diligence of a project considering all the risk aspects, restitution and reliability capacity; from the foregoing derives the importance to grant a Rating to the project. All of us heard about AAA, AA, BBB, etc. Well, this is an index issued by a specialised agency (e.g. Moodys, Standard and Poors, among the most famous), which gives a suggestion about the reliability and the project risk. It is a kind of mark issued by an independent body that has carried out a Due Diligence and established a credit merit. The more the mark is high, the more the project financing is easy and profitable, and if the mark is higher than the Investment Grade (i.e. a permitted floor) the debt title can be placed on the public market and split, with the certainty that the investors will buy it. It is easier to place the debt in small tranches with good profitability rather than negotiating with a single investor.
The Rating is a factor of split facility and placing of the debt, and the Rating takes into account both the reliability of the Public Administration and the reliability of private bodies concerned. CONCLUSIONS Ultimately the conclusions to be drawn as to the roles, between the public and the private sector to aid and optimise the infrastructure investments can be summarised as follows : > The public sector shall : Become the interpreter of the needs and stimulate the investments. Lay down clear rules, guarantee of the law, certainty of bureaucratic and legal times, take steps to adjust laws and regulations (Merloni ter and establishment of the Technical Unit, Project Financing are two examples), but also act on the taxation sector.
Carry out a support action for the initiatives of public utility also assuming a part of those risks that cannot objectively weigh only on the private body (traffic risk, minimum guaranteed or income support guarantee). > The private sector shall : Satisfy the public sector objectives. Stimulate the identification and planning of said objectives and be proponent as to projects that are actually necessary and with income capacity. Be available to long-term investments. Accept the transparency and the implicit controls in.
Massimo Sergio Dal Lago, Argentina TORNO INTERNAZIONALE S.p.A., Milano
AITES
ITA
Topic
Introduction to the Legal Aspects of Projet Financing
Author
J. Huse
published
Qu'est-ce que le financement de projet? Qui sont les participants, les diffrentes phases? Quelles sont les diverses natures de contrats?
Meetings
Remarks:
2 INTRODUCTION TO THE LEGAL ASPECTS OF PROJET FINANCING

Qu'est-ce que le financement de projet? Qui sont les participants, les diffrentes phases? Quelles sont les diverses natures de contrats?
J. Huse
INTRODUCTION What is project financing ? Project financing is financing the development or exploitation of a right, natural resource or other asset where the bulk of the financing is not to be provided by any form of share capital and is to be repaid principally out of revenues produced by the project in question. The essence of project lending is therefore its focus on the project being financed. The project lender looks, wholly or mainly, to the project as the source of repayment; its cash flows, and assets where appropriate, are dedicated to service the project loan. The project cannot even begin to provide for repayment until it is operational, and then depends on continued sound operation, so its analysis is critical. Key elements of project financing The financing of the project is made available and the money is invested before the construction of the infrastructure is completed. The project lenders have no recourse outside the specific project (or only limited recourse). This means that the project lenders limit their recourse to the project companys assets and revenues in case the project company is unable to repay its debts. Therefore, there are no guarantees of the project companys obligations to repay loans other than the security provided by itself. Project financing is usually used for : - natural resource projects (mines, hydrocarbons, etc), - infrastructure improvements (including power stations) - new industrial plants (factories). Major risks involved in Project Financing Completion (construction) risk : who is responsible for ensuring completion is achieved. Revenue risk : how reliable are revenue forecasts of the project. Political risk : host government interference. WHO ARE THE PERSONS INVOLVED IN PROJECT FINANCING The host government The objectives of the host government in putting a project up to tender (i.e. selecting sponsors to deve-
lop a project usually by way of a tender process and allowing a private sector entity to develop a project are usually the following : to satisfy the national interest by developing a project, to bring the project back into public ownership once the private sector has received an acceptable return on its investment (BOT), to have adequate safeguards and assurances that the project will be operated properly and in the public interest, to reduce or eliminate the need to use the governments own funds or borrowings, to limit the undertakings given by the State, to be able to offer the ownership and/or operation of the project to other private sector entities should the original private sector participants fail to provide the required level of service or run into financial difficulties. The private sector sponsors The private sector sponsors are the companies who offer to develop a project. Their objectives are usually the following : To satisfy a strategic corporate objective by completing the pro j e c t . To extract profit by : - simple investment return, - selling equipment or raw materials to the project company, - by buying the projects products. To share the risk in carrying out a project (the damage of the project if it goes wrong is shared with the other actors (i.e. banks, suppliers, contractors, off-takers and host governments). To carry out the project off balance sheet (hors bilan) the sponsor developing the project does not have to show any borrowing for the project among its borrowings in its consolidated accounts. The project company A special purpose vehicle is usually incorporated by the project sponsors specifically for the needs of a project. The project company will have the following features : its scope of business will usually be restricted (both by constitution and by finance documentation) to the project, capital structure of the project company generally
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2 INTRODUCTION TO THE LEGAL ASPECTS OF PROJECT FINANCING
involves a relatively aggressive debt to equity ratio, limited liability company structure in order to insulate the sponsors from the risks and liabilities inherent to the project, flexibility of management structure, ease of dissolution. The contractor (s) The project company will generally enter into one or more construction agreements in order to provide for the construction of the main project assets (i.e. power station, toll road, factory). Operator The project company will generally enter into an operation and management agreement (O&M agreement) with an operator, which shall operate and manage the project at certain levels of quality and quantity. Supplier The project company will need supplies in order to produce/manufacture goods or services and these supplies shall be provided by one or more suppliers. Off-Taker The project companys revenue will exclusively (in most instances) be generated by the sale of its products or services to one or more buyers generally referred to as off-takers. Political Risk Insurers The development of a project often involves foreign sponsors being involved in a State represented by a host government where there is a potential risk that the host government does not respect its undertakings vis--vis the sponsors and/or the project company, expropriates the project company from its assets or renders the project revenue difficult or impossible to convert into hard currency. In order to cover such risks, banks, sponsors and the project company usually take out political risk policies with political risk insurers. Political risk insurance is generally provided by national agencies, which encourage national exports, commonly referred to as export credit agencies or ECAs : In France : COFACE (Compagnie Financire dAssurance pour le Commerce Extrieur). In Germany : HERMES (Hermes Kredit-Versicherungs AG) In the United Kingdom : ECGD (Exports Credits Guarantee Department) etc... Others In some instances the project company will also need to enter into an agreement with a technical assistant
to provide technical assistance for the management of the project. In all cases the project company shall take out insurance policies covering damages to third parties or to its assets and loss of profit by entering into agreements with insurers. PROJECT PHASES Construction Phase Prior to and during this phase : The project contracts and the finance documents are negotiated and signed. The contractor(s) commence the construction of the project assets. Money is invested in the form of : - equity (by sponsors), - subordinated loans (from sponsors), - government grants (by host government), - senior project loan (by project lenders). This phase finishes when the project assets are completed and are ready to be operated commercially. Operating Phase During this phase : the assets are operated and maintained and revenues are generated, government subsidies are eventually perceived, the project loans are repaid by the project company. MAIN PROJECT CONTRACTS Concession Agreement The agreement entered into between the sponsors / project company and the host government by virtue of which the project company is authorised to develop the project. The main clauses of this agreement involve : scope of responsibility of the project company and host government, statutory requirements and host government authorisations, the description and specifications of the site granted to the project company for the purposes of the development of the project, the technical specifications of the project, payments to be made by the project company to the host government (concession fee), payments to be made to the project company if the host government is the off-taker, guarantee by the host government of foreign exchange availability and transfer of funds, tax regime of the project company and the project, performance guarantee, reporting and regulation, Force Majeure, guarantee
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against change in circumstances, duration, governing law, dispute resolution. Construction Agreement A construction agreement is the agreement whereby one person (the contractor) agrees to construct a building or a facility for another person (the employer) for an agreed remuneration by an agreed time. In a complex construction project comprised of various interlocking parts (involving both civil and mechanical and electrical works), the basic decision to be taken is whether to have a contractor responsible for all of the works (a turnkey contract, contrat de construction cl en main) or to have the individual contractors enter into separate contracts with the employer but to have them subject to control by one overall project manager. Often a turnkey contract is preferred in order to insure that the turnkey contractor assumes overall risk for completion as well as the risk of performance of the sub-contractors. The main clauses of this agreement involve : technical specifications, authorisations to be obtained for the works, completion agenda, testing procedures and performance parameters, determination of phase / final completion, fixed price and provision relating to overruns and payments, liquidated damages payable for delay in achieving completion, transfer of property and risk, construction bond/completion guarantees (garantie dachvement), insurance arrangements, cooperation and coordination during the works, final provisions (governing law, dispute resolution etc.). Shareholders Agreement / Joint-Venture Agreement The shareholders of the project company are in most instances the sponsors of the project. Due to the particularities of some jurisdictions and more generally those involved in the management and financing of a project company, the shareholders often enter into a shareholders agreement. The main clauses of this agreement involve : voting rights, nomination of management / major decisions, dividend distribution, pre-emption rights, each shareholder's contribution in equity to the project company and its agenda, non-dilution, shareholders loans, conflict of interests (if one of the shareholders is a party to an agreement to be entered into with the project company), non-competition clauses, final provisions.
Operating and Maintenance Agreement In most instances the project company will enter into an agreement with an operator which will be responsible for the operation and maintenance of the project facility. The main clauses of this agreement involve : scope of responsibility of the operator, operator's fees, guarantee that the project will achieve certain operating levels (production and efficiency), operation bonus/liquidated damages, cooperation and coordination, operation and maintenance fees, final provisions. Supply Agreements In most instances the project company will need to enter into a number of supply agreements in order to purchase the main supplies for the operation of the project facility. These may include feed stock (raw materials for the manufacturing process), fuel (for electricity generation or for the supply of power to the plant) or renewable equipment. The main clauses of this agreement involve : level of supply, price (fixed or indexed), supply guarantee, quality of supply, liquidated damages, final provisions. Off-Take Agreements A project need not necessarily have an off-take agreement in the sense of a long term product purchase agreement since : - its products may only be capable of being sold on world spot markets (e.g. crude oil), - its revenues may simply be payments from the general public (of tolls or fares). An off-take agreement is a long-term sale agreement of the project products with one or more off-takers with the following characteristics : long-term sales, fixed or agreed price, purchase guarantee (take-or-pay). Other The project company will in all instances enter into assurance arrangements. The project company may also enter into a technical assistance agreement. FINANCE DOCUMENTS Loan Agreement This agreement is entered into between the project company and a bank or a syndicate of banks represented by an agent acting in their name and on their behalf if the loan is syndicated. This agreement will provide for the partial financing of the project (since the project will also be financed by equity,
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subordinated loans, host government subsidiaries, etc.) The loan agreement will contain the following provisions : > Basic Provisions : general conditions precedent, conditions precedent to each drawdown, drawdown mechanics, interest clause (Euribor, Libor, etc.. plus margin), repayment clause, margin protection clauses (gross-up clause, increased costs and market disruption), illegality clause, representations and warranties, undertakings, events of default. > Specific Provisions : non-recourse or limited recourse clauses, cover Ratios and Net Present Value, control accounts (disbursement account, proceeds account, compensation account (for insurance payments), debt service reserve account and a maintenance reserve account), hedging (protection of a borrower from adverse movements in currency exchange rates, interest rates and commodity prices) Security Package Lenders take security over an asset or a right in order to sell it if their loan is in default and to apply the proceeds against amounts outstanding under the loan. In project finance the lenders' main legal concern is also to ensure : that they can take effective security over the main project contracts, that the key contracts remain in place in one from or another if and when they enforce their security. In order to achieve the first concern, each contract must be charged or assigned to the lenders by way of security and any consents required from the other contracting parties for this to occur must be obtained. In order to achieve the second concern, it will be necessary to examine the termination clauses in each contract. Often, there will be provisions entitling the other contracting parties to terminate the contract if the project company is insolvent or if any security it gives is enforced. For this reason, lenders will usually seek to have the provisions amended or to have the other parties enter into direct agreements with them. Direct agreements are agreements entered into between the project company, the banks financing a project and the parties to the projects key commercial contracts. The key contracts for these purposes would typically include the concession agreement (if any) the construction agreement, any long-term supply agreement and any long-term sales agreement. Direct agreements are also sometimes sought from the authorities issuing consents necessary for the project.
The objective of a direct agreement is basically to enable the banks to step into the shoes of the project company if it defaults in its loans obligations. Banks would usually expect a direct agreement relating to a commercial contract to contain the following : consent from the third party to the project company charging or assigning by way of security the project companys rights under the relevant contract (to such extent such consent was required), an undertaking from the third party that it would not exercise any right it had to terminate the contract without first giving the banks a specific number of days prior written notice, an agreement from the third party that, if it gave the banks notice of the type referred to above and the lenders in turn gave it a counter notice, then the third party would either allow the banks (or an agent appointed by them) to assume the project companys rights and obligations under the contract for a specified period of time or allow the transfer of the contract to a separate company (a work-out vehicle) established by the banks for this purpose. Intercreditor Agreement The intercreditor issues that arise in project financing are related to situations where there is more than one provider of debt finance. If one layer of finance is to be subordinated to another, an intercreditor agreement will usually set out the terms of the subordination. If no layer of finance is to be subordinated to another, an intercreditor agreement will usually address issues such as whether all of the categories of lenders have to agree before any of them can accelerate their loans or take enforcement action and whether or not any category of lenders is to have the right to veto any proposed exercise of a discretion under any other lenders credit documentation. Intercreditor agreements will typically contain the following provisions : voting arrangements and procedural provisions relevant to decision making, appointment of agents and similar entities to perform specific functions on behalf of groups of lenders, disclaimer provisions for the benefit of agents, application of cash as amongst different groups of lenders (not all of them may have the benefit of the same security), order of application of cash as to specific project and lender requirements (waterfall cascade).
Joseph Huse, lawyer, Freshfields Bruckhaus Deringer
13
AITES
ITA
Topic
Dealing with Geological Risk in Bot Contracts
Author
E. Schneider
published
Le modle "KEFIR" imagin et dvelopp la facutl d'Innsbruck s'applique aux ouvrages souterrains raliss dans le cadre de contrats cl en main. Il a pour but d'accrotre l'utilisation des contrats BOT dans le domaine des installations hydrolectriques.
Meetings
Remarks:
3 DEALING WITH GEOLOGICAL RISK IN BOT CONTRACTS

Le modle "KEFIR" imagin et dvelopp la facult d'Innsbruck s'applique aux ouvrages souterrains raliss dans le cadre de contrats cl en main. Il a pour but d'accrotre l'utilisation des contrats BOT dans le domaine des installations hydrolectriques.
E. Schneider
BOT-MODELS FOR INFRASTRUCTURE BOT models are being used worldwide in the infrastructure sector. Many successful examples for toll motorways, toll bridges, thermal power plants, water supply plants etc. prove that this model is attractive for the private sector. However, only a small number of projects have been realised in the field of hydro power plants, and those are only projects without any significant sub-surface works (such as the Birecik power plant at the Euphrates river in Turkey).
modified in the direction of more competition. In his doctoral thesis, M. Spiegl [7] has developed a model that offers a convincing solution for both problem areas. Another objective to be realised with this model is the promotion of qualified competition that rewards primarily the bidders' innovation potential and know-how rather than their readiness to take risks. System provider concept The system provider concept offers substantial advantages for BOT models in the construction of hydro power plants and traffic tunnels. In that case, the bidder has the incentive to optimise the project over its whole lifespan in a holistic way. Under optimum circumstances, the concentration of the whole performance range of design, financing, construction, operation and maintenance in one hand means that the criteria for low lifecycle costs are already taken into account during design [2]. In most cases, the organisation form of the consortium has been selected for the construction of large hydro power plants. Due to the major part taken by construction work in the total package, such consortia have been mostly led by a construction company. Risk sharing In contrast to current practice, it is not sensible to let the bidder assume a project's unlimited risk from geology and hydrology because the resulting risk surcharge would make the project unviable. It is more sensible to have risk compensation - at least for extraordinary risks - compensated via the owner's project portfolio, and have the licensee assume geological risks, (and in the case of hydro power plants, also hydrological risks) only to a limited extent. In general, the contractor is also unable to assume unlimited risks due to financing constraints, as doing so might exceed the scope of financing. The assumption of extraordinary risks by the owner - expediently, by forming a risk fund - also ensures that competition is not exclusively about readiness to take risks. Lower project risks make the project more attractive for competitors and lead to more extensive competition. Standard contracts for BOT models On an international level, the FIDIC EPC Turnkey
Examples of Infrastructure where BOT-Modells can be adoped.
BOT models for major sub-surface works Projects with a substantial sub-surface works, in par ticular long diversion and pressure tunnels, shafts, and caverns (which are typical of high and medium pressure hydro power plants), as well as long road and rail tunnels include a high geological risk. Using the contracts and risk allocation schedules that have been usual with BOT models so far, such projects are mostly unattractive for private investors (as has been shown in India), because different types of infrastructure have different risk profiles. To stimulate the application of the BOT approach to such projects, it is necessary to develop an approach that takes the special risk potential of such project into consideration. Furthermore, the current practice in most cases of negotiating with only one interested party is not only unsatisfactory for the owner but also detrimental to the national economy, and should be
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Standard Contract (Silver Book) has established itself for BOT projects. That contract implements projects on a fixed-price turnkey basis and with a strict twoparty approach, which involves a higher degree of risk for the contractor. In this, it deviates from the FIDIC principles of a balanced risk sharing (Red Book). It is therefore not suitable for projects with a large amount of sub-surface work. This is expressly laid down in the Silver Book. The following K E F I R model has been developed in order to also enable the application of this proven standard contract to projects with a large sub-surface component. It provides a formula for fair risk-sharing between contractor and owner and a corresponding remuneration clause. The most important novelty is the introduction of an upper limit of risk expressed in monetary terms up to which the contractor takes on the full geological risk. The cost and time consequences of risks exceeding that limit is assumed by the owner. This gives contractors as well as financing institutions a better overview of the risks and a better basis for calculation.
often used in context with BOT. Necessary basic conditions and requirements The model described below assumes that there have been preceding pre-qualification proceedings (as is usually the casel). The concept also assumes that the owner has a "concrete project image" of the project, which includes requirements for hydrological engineering, construction, energy management, and time-limits. This requires considerably more extensive preliminary work on the part of the owner in order to prepare the project for tendering - this includes development of the construction areas, geological research etc... This preliminary work and these basic conditions make sense in that they minimise many of the possible risks, and that the basic conditions (such as the location of barrages and tail race) are generally set in advance by feasibility studies and general layout plans. Experience in India, for instance, also shows that without sufficiently extensive preliminary work by the owner, it is not possible to arouse sufficient interest from private investors. For these preliminary works, the new Indian National Policy on Hydro Power Development [4] has been establishing a National Power Development Fund, which is financed by a new energy tax yet to be introduced, with the intention of accelerating the utilisation of the countrys large unused hydro power reserves.
Modular integration of the "K E F I R" module into e.g. the FIDIC EPC Turnkey Contract for projects with sub-surface works.
THE "K E F I R" MODEL In the following, this paper concentrates on the subsurface works handled by the "K E F I R" model in the framework of e.g. an EPC Turnkey Contract. The acronym K E F I R stands for Kosten-Einbringung von Know-howFinanzierungInnovationRisiko, which means CostInput of know-howFinancingInnovationRisk. In this paper we are using the term contractor instead of project company or concessionaire and owner instead of host government which are also
Chenab river valley in Jammur & Kashmir (India)
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Introduction of innovation potential and know-how Part of this model concept is the stimulation of innovation and know-how. The current tendency in hydro power construction by BOT is towards purely riskminimised projects. Often, there is no risk-sharing with regard to geological risks, and concession periods are too short, which means that there is no optimisation of lifecycle costs. An example oflacking lifecycle optimisation would be the use of an upstream free-surface channel instead of a direct connection through a pressure-tunnel. The tunnel would have advantages for future operating states (switching actions). It is also an objective of the model concept that TBMs should be used in the long tunnels mostly situated on the critical path, thus reducing construction time with all consequences for lower financing costs and earlier revenues from power production. Expectations of the parties The owner defines his expectations by a functional description of the project, a geotechnical description (GBR - Geotechnical Baseline Report) on the basis of a geotechnical database (GDB) that is as independent as possible from the construction method. Furthermore, he informs the bidders of the qualitative results of his risk analysis and on that basis defines the financial limit to which prospective bidders have to bear risk. In our model, that limit is called "Maximum Bidders Responsibility - MBR".
geology, i.e., the competitive tender remains effective up to the MBR (surcharge over the lump-sum price).
Graphic display of the remuneration and risk allocation under the "K E F I R" model concept.
Lump Sum Expectation The owner determines his Lump-sum Expection (LEOW), but does not tell it to the bidders. The licence biders in turn determine their own Lump-sum Expectation (LEBI), which represents a minimum revenue (in the sense of Attribuable Construction Costs - ACC for the project). The area of difference between MBR and LEBI is integrated into the tender by way of remuneration percentages. Special cases It is possible that there are cases in which the MBR has been incorrectly stated by the owner. If the MBR has been stated to low, the incoming tenders of bidders will lead to a reconsideration of the project idea. A MBR that is too high will most likely lead to relatively high remuneration percentages at the beginning of the area of difference, which are integrated into the assessment of tenders and only become relevant in the case of effective risk. However, speculative bidders would suffer a high shortfall of revenues until reaching the MBR. In any event, setting the MBR is an instrument of control for realistic price determination. Prevention of speculative tendencies The model concept supports realistic price determination with a clear allocation of risks and a limitation of risks by a gain/pain mechanism. The bidder's Lump-sum Expectation represents a minimum revenue, even if conditions prove better than expected (bonus). In this case the contractor enjoys a higher profit.
The owners estimation of costs and risk analysis results in his LEOW, as well as to the progress of his cost expectation. The owner informs the bidders of the qualitative progress of this cost expecta tion (= weighting function in assessing tenders) and of the Maximum Bidders Responsibility (risk limit).
Maximum Bidders Responsibility - MBR The Maximum Bidders Responsibility represents the financial limit from which it is the owner who will bear the costs caused by the geology. But below that, the contractor is responsible for his expectations to the
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Risk is assumed by the contractor up to MBR, regardless of the nature of the event (exceptions are possible in special cases), assumption of risk is subject to competition, too optimistic (possible speculative) expectations in competition are reduced by a pain/gain mechanism during implementation. Financial limitation of risk lower risk surcharges necessary, easier financing wider range of interested parties. Generally lower risks due to more preliminary works. Target Costing elements The model shows elements of "Target Costing", two targets being defined : MBR as the limit to which risk is assumed (set by owner), LEBI as "upwards-adjustable Lump-sum price" or minimum revenue (bonus mechanism), The bidders offer a remuneration percentage for the area of difference in accordance with their risk analysis and entrepreneurial decisions (tender by bidder). The schedule for allocating any additional costs to the Lump-sum price or lower costs compared with the MBR is not fixed as in a GMP contract but is subject to competition by the bidders. If the actual costs are situated in the area of difference, the contractor must bear the revenue shortfall in accordance with the curve of the remuneration percentage offered by him. Determination of best bidder Since the expectations of owner and bidders regards geology at that time are of a subjective nature, a method of assessing tenders under the requirements of innovation, know-how and preventing speculative tenders must be defined.
The best bidder is therefore determined from weighting the following tender components : Bidder's Lump-sum Expectation (LEBI), Curve of remuneration percentage in the area of difference, Comparative calculation of the owner's expectations, which are determined using the bidder's prices on the owners geological expectations, Comparison of guaranteed performance and the connected time-dependent costs. At that time, the conditions encountered in excavating are not known ; it is therefore impossible to decide objectively which expectation is correct. The weighting factors must be primarily set in a project-specific way. Furthermore, specific weighting can be used to influence the amount of the Lump-sum price in relation to other tender components. Self-regulation mechanisms If there is a negative deviation of encountered conditions from the owner's as well as the contractor's expectations i.e., if conditions are substantially worse than expected - the MBR is exceeded. The contractor must already bear his revenue shortfall (including the geological risk up to the MBR).
Progress of the revenue shortfall (in % of turnover) depending on the MBR selected, assuming that the Lump Sum Expectations of owner and bidder are identical.
Diagram to determinie the best bidder taking into account the rele vant tender components.
However, the worse conditions become, the lower the pro rata revenue shortfall of the owner gets. Assuming that his prices cover his costs, his situation is becoming better and better, the revenue shortfall is thus mitigated - following the idea that if conditions are totally different from what both parties assumed, it should not be the contractor who should bear the geological risk. Indirectly, this promotes cost-covering prices
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because the tender should remain effective if possible. This requires a separate accounting of overheads, onetime costs, and time-dependent costs [3][5][6]. Monitoring of construction For sub-surface works, monitoring of construction by the owner is indispensable. A joint recording of the actual event is absolutely necessary to determine the "Attributable Construction Costs". These costs are compared with the parties expectations and then subject to the described regulation mechanism. Dispute resolution In order to avoid lengthy legal disputes, the model should be accompanied by a multi-stage construction monitoring and dispute resolution system that meets the requirements of sub-surface works. This mainly include shortened decision paths and on site decisions. SUMMARY It is the objective of the "K E F I R" model concept to increase the number of BOT projects in the hydro power sector. For this purpose, the risks specific to hydro power and sub-surface works must be reduced for the contractor (project company). On the other hand, the innovative power and the know-how of the bidders should be stimulated. To that end, "K E F I R" follows the principles of a sensible allocation of risks depending on the spheres of influence. It eases financing problems by implementing a financial limitation of geological risks (MBR). The expectations of bidders into the geological conditions are subject to competition but controlled by a gain/pain mechanism to reduce speculative tenders because the contractor is responsible for possibly overoptimistic expectations (revenue shortfall up to MBR). Due to the risk reduction, there will be a more extensive competition among qualified bidders, with higher chances of project realisation and lower project completion risk. Weighting of different tender components strengthens the best-bidder principle as compared to a pure lowest-price-bidder principle and does not reward the readiness to take risk. If conditions are totally different from those predicted, the contractor is responsible for his tender up to the MBR, but then the revenue shortfall percentage is reduced as actual construction costs increase.
REFERENCES : [1] FIDIC-EPC Turnkey Contract (Silver Book), 1999. Conditions of Contract for EPC Turnkey Projects. First Edition, Lausanne. [2] GIRMSCHEID G., BEHNEN O., 2000. Das Systemanbieterkonzept Ausweg aus dem Preiswettbewerb. Bauwirtschaft, issue 3. [3] ITA-RECOMMENDATIONS, 1988. Recommendations on Contractual Sharing of Risks. Journal Tunnelling and Underground Space Technology, Pergamon Press, Vol. 3, No. 2 [4] NATIONAL POLICY ON HYDRO POWER DEVELOPMENT ; 1998. Government of India. [5] SCHNEIDER E., BARTSCH R.H., SPIEGL M., 1999. Vertragsgestaltung im Tunnelbau. Felsbau 2, Jhg. 17 [6] SCHNEIDER E., BLAIKNER D., 1997. Behandlung der zeitgebundenen Kosten in Tunnelvertrgen. Tunnel for People, ITA-Kongre Wien 97, p. 769-755. Balkema:Rotterdam. [7] SPIEGL M., 2000. Ein alternatives Konzept fr Risikoverteilung und Vergtungsregelung bei der Realisierung von Infrastruktur mittels Public Private Partnership unter International Competitive Bidding - Mit Schwerpunkt auf den Untertagebau von Wasserkraftwerken. Doctoral thesis at the Institut for Construction Management and Construction Economics, Leopold-Franzens University Innsbruck, Austria.
Eckart SCHNEIDER, Markus SPIEGL Institute of Construction Management and Construction Economics,Faculty of Civil Engineering and Architecture, Leopold-Franzens University Innsbruck, Austria
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AITES
ITA
Topic
Geotechnical Risks for Project Financing of Tunnels in Non-Urban Areas
Author
G. Lombardi
published
Les conditions physiques et conomiques limitent l'importance des reconnaissances et des essais pralables la construction d'un ouvrage souterrain. Les donnes disponibles sont d'autant plus imprcises que le tunnel construire est long, profond, de grande section, et que son environnement est complexe.
Meetings
Remarks:
4 GEOTECHNICAL RISKS FOR PROJECT FINANCING OF TUNNELS IN NON-URBAN AREAS

Les conditions physiques et conomiques limitent l'importance des reconnaissances et des essais pralables la construction d'un ouvrage souterrain. Les donnes disponibles sont d'autant plus imprcises que le tunnel construire est long, profond, de grande section, et que son environnement est complexe.
G. Lombardi
INTRODUCTION You may be happy to have to build a tunnel of up to a dozen kilometres outside the urban area. You may thus avoid a number of problems like the archaeological ones or the crossing of existing sewage ducts. And, when the tunnel is deep enough - lets say a few hundred meters below ground - you may also avoid arguments with the inhabitants of the city about vibration and noises or problems of settlements of important buildings. If then by chance, the rock conditions are ideal, well known in detail and fit exactly the requirements of the TBM-equipment you have at hand and further more if any kind of problems with water or faults can be ruled out, then you will be absolutely happy and lucky. I would then be pleased to congratulate you for the excellent business you are about to do - provided of course you got also a regular price for. But, you will have to admit that these conditions will be more likely to represent the great exception than the rules in tunnelling. So, let us have a look at the main questions involved in such underground works which are destined to be tunnels for transportation, for the scope of conduction of water, any other type of fluid or energy, or caverns for any kind of human activities or finally to store any type of goods. In doing so, we will only take into account the engineering aspects of the construction, not the electromechanical equipments nor the operation of complex activities. COMPLEXITY OF LONG DEEP TUNNELS Deep tunnels are not just the extrapolation of shallow ones. New aspects arise. A rock mass, which at shallow depths would behave in an elastical or, to some extent, in a plastic way, may show at depth completely different body-laws where viscosity or the so-called "softening" may play the most important role. In other circumstances, the best rock on the ground may be affected at great depth by burst or spalling problems and may turn out to be a very bad one. In some cases the swelling of the rock mass, which is harmless at shallow depth may develop so to be a lot more harmful there.
Not to mention the increasing water pressure, but also the increasing temperature, which can be significantly less than very comfortable. Also, in spite of a great depth, one cannot be absolutely sure to escape environmental problems or arguments with the inhabitants or owners in the region. Indeed, controversies on real or virtual problems cannot be ruled out. First of all, questions with the depressing of the ground water table and the drying out of springs, even if the tunnel is very deep, cannot be completely excluded. But, one must also remember the possibility of significant settlements due to the draining of the mountain by deep tunnels, which can affect some stiff structure on the ground like concrete dams. At the reverse, an excessive internal water pressure and losses from the tunnel may induce slides on the ground.
The excavation of the exploratory adit drained the ground water entrapped in layer D, caused the settlement of the region and damaged heavily the Zeuzier arch dam.
But, these are just a few of the special conditions, which may be met in a deep and long tunnel. The third dimension, that is the axis of the tunnel also needs to be looked at. This refers to the extension of each particular zone of the rock mass and thus of the number, frequency and distribution of the changes as well as to the relative position and orientation of the various domains to be encountered, showing different properties, state of stress or degree of alteration.
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All the possible combinations - including obviously the most adverse ones - are to be duly considered and only a few of them can be ruled out beforehand. The same story can be told on water, its flow rate, pressure and chemistry. UNCERTAINITIES Except in special cases - such as the drilling of a tunnel parallel to an existing one at reduced distance provided of course similar methods of construction are to be used as for the former one - an extremely great number of uncertainties must be accounted for and introduced in the reasoning before starting with the design of any important underground work. If you have for example the splendid opportunity to overfly the Alps on a clear sunny day, especially in wintertime, you may be impressed by the overwhelming beauty of the landscape, but you may also become aware of the extreme morphological complexity of this mountain chain, whose shape includes a number of fractal aspects. And, if you think that this extraordinary landscape just represents a kind of simple geometrical expression or interpretation of the actual geotechnical complexity hidden below the ground - which inter-pretation is governed by the relatively simple rules of the free field gravitational equilibrium - you may have an idea of what a tunneller may encounter, excluding of course the magnificent wide view you can enjoy from your comfortable seat on the plane. The problem for the tunnel designer can be stated nevertheless in a very simple way and can be easily solved. He has simply to express the synthesis of this complexity by two possibly very precise numbers that are "Cost and duration of the construction". Well! This is at least the opinion of the people who have to wait for the tunnel and to pay the cost. REDUCING THE UNCERTAINITIES The main task for the designer is thus to try to reduce such uncertainties. First aid is coming from the geologist looking down from the surface to the future under-ground opening. Obviously, the deeper the tunnel, the weaker the sight is and the more psychologically coloured intuition is required and cannot be avoided. A certain support may possibly be found in former studies, investigations and construction records, but quite soon specific new investigations will be needed. Boreholes, shafts and adits may be of great help, provided they can be really carried out and are not impe-
ded by some environmentally founded restrictions, specifications and difficult conditions, or even impossible, to fulfil, no matter whether they correspond to the reality or are an alibi. There is for sure no need to list here all the geological, geophysical, physical, chemical, hydraulic and mechanical methods and devices that can be used to define in the best possible way, the geological, geotechnical, hydro-geological and geo-mechanical conditions to be expected during construction. Fortunately or unfortunately - depending on the point of view - there is always somebody in charge of some legal rule intended to limit the expenses due to such investigation programs. More exactly, the officially declared intention is to establish an optimal costs-benefit balance. How risky this exercise can be is due not that much to the fact that their costs may be underestimated, but to the fact that the benefits of the investigations are undefined, by definition. Or, if you prefer the problem is an implicit one. This means that, you can often decide whether the investigation was worthwhile or not, only once it has been carried out. Of course, even drilling a few hundred metres long borehole with the aim of just finding out how intense the jointing of the rock in a short tunnel section is, may be considered a waste of money, because at the end of the day the result will not change the amount of rock supports actually required and placed. On the contrary, the excavation of an investigation adit several kilometres long may turn out to be a relatively small investment, if it means avoiding great difficulties during the construction of the tunnel for example in slightly modifying its layout. The qualification of the rock mass remains a difficult task.
Different definition of the rock classes by two formulae.
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Indeed, I know only a few cases where, after construction, the investigations were considered as having been excessive, but many more cases where more investigations would have been very useful in allowing a reduction of the total cost and of the duration of the works. In spite of such quite theoretical exercises of optimisation, there is generally a "common sense" or intuition acquired with experience - which may at the end be proven to be right or wrong - that leads to decisions going from a minimal number of short boreholes at the portals, to the drilling of a pilot adit all along the tunnel, depending on the supposed degree of uncertainties and on the aim of the investigation campaign possibly related to tendering and contractual aspects or procedures. But, no matter what you do as designer, at the end of the game the geological and geotechnical diagnosis and prognosis will always be considered - by the owner or by the contractor- as having been wrong. Again, some help will be offered by the geologist, who will be pleased - I hope so - to share the responsibilities. Quite likely the engineers and geologists will be supposed to be responsible - at least morally - for any cost and time overrun, no matter what they decided, proposed or merely suggested. In any case, there is obviously a reasonable limit to the investigations and the analyses, which can be carried out or developed at design stage, so that as a rule, the knowledge of the ground the designer can work upon, will be severely limited and the number and amount of remaining uncertainties will be significant, if not considerable. FUZZY DATA BASE Additionally, the data available are always known only with some approximation, so one can consider them, without any doubts, as being quite fuzzy, or in other words, as forming a "fuzzy data set". On this fuzzy set a supposingly final design has to be based, which should lead to an exact definition of the costs and the duration of the construction. Thus, no wonder that geoengineering - which by the way includes not only tunnels, but also dams and similar works - was called the "fuzziest of all the engineering branches". By "geoengineering" one may in fact understand the branch of civil engineering where the ground is not to be considered only as one of the boundary conditions, let's say the underlying one, like the foundation of an usual building, but as a constitutive element or material of the entire project itself. Obviously, this is
especially true for tunnels. At the end of the day, and as a rule, this set will remain fuzzy in spite of the many efforts made to reduce its fuzziness by field investigations or office computations.
The uncertainty triangle (by Prof.Alberto Bernardini)
The consequence of this situation is that both design and construction methods must include a great amount of flexibility as well as adequate provisions in order to face unexpected conditions under the ground. MONTE CARLO ANALYSIS With few exceptions, the data forming the set are independent each from one another. A small exception is, for example, the fact that the lengths of the single stretches must sum up to the total length of the tunnel. Furthermore, one can assume that for each type of rock only a certain set of geo-technical parameters can apply. On the contrary there is no reason at all, that, for example, the width of single faults correlates in one way or another with the friction angle in the discontinuities of the rock mass of other tunnel sections, while both values will of course influence, in the one or the other way, the total cost of the tunnel and the construction schedule. As known, any element of a fuzzy set is supposed to be defined by a minimum, a maximum and an "average", or most probable value, as well as by a density distribution of probabilities from the minimum to the maximum value. In general, this distribution is supposed to be triangularly shaped with its peak at the assumed most probable value.
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of information, a non-suitable method of interpreting the test results, or to compute the requirements of rock supports, the use of a non-appropriate method of construction, cannot be detected in using these methods, which nevertheless can be very useful in as-sessing the most probable results. COMPUTATIONS During the recent decades, the computational methods to solve civil engineering problems and especially to analyse rock mechanic questions did develop very significantly. It appears that today no evident mathematical limitation exists any longer in this field.
The usual triangular-shaped assumption for the density of probability for a Monte-Carlo simulation.
In this respect one has to underline the fact that this is no real reason at all for this distribution to assume that shape. Also one must be aware of the fact that, as a rule, both limits as well as the most probable value are just the result of a process of estimation or guessing. Apart from all the weaknesses of this statistical procedure, it however appears to be the only way out of a dilemma, and is a confirmation of the thesis that statistics are the most pleasant and efficient way to hide our ignorance and to escape the quagmire of fuzziness in singing a triumphant tune. In fact, it is quite likely that no one will ever be unlucky enough to discover that all along the tunnel all the parameters will assume at same time the most unfavourable value. Or one may say, that the theoretically possible absolute worse combination is very unlikely to occur. In the same way, also the absolutely best combination of conditions cannot be expected. In reality however, even a worse than the worst expected situation did occur from time to time ! Nevertheless, procedures based on a Monte Carlo algorithm can thus be used to define a plausible probability distribution of such overall costs and duration of the project considering the internal compensations, which are to take place. The scattering of the results around the average is reduced sometimes to a quite astonishing degree ; the compensation being of course the more likely and effective the longer the tunnel is. The probabilities obtained in this way may be very useful for the steps to follow during the development of the project, but do not eliminate the fact that the base for design and construction remains always fuzzy. Also a number of important aspects, like for instance : the degree of optimism of the designer, a psychologically distorted procedure in estimating some fundamental elements of the same set of pieces
Flow chart of an analysis. Fuzzy data, fuzzy links and fuzzy results.
However, it is obvious that no computation can be more valuable that the data used as in-put. Unfortunately, from time to time this aspect is ignored and that the computation results are interpreted in a way intended to hide more than to highlight this weak spot. Also the vague and fuzzy aspect of said input data-set is not duly enough taken into consideration in the computations themselves. This fact may lead to some additional distortion of the overall results of any risk analysis developed on the base of a Monte Carlo type method. GAMBLING, INSURING OR TRANSFERRING ? Given this fuzzy situation, which can be made less vague only to a quite limited extent, in carrying out
22
additional investigations, more computations or Monte Carlo simulations, there are a number of positions, which can be taken. They may be called : gambling with risks, assuming them, covering risks by insurance, sharing them with somebody else, or transferring them. While keeping in mind that geoengineering is one of the fuzziest fields in civil engineer-ing. There is of course nothing new, nor surprising when I say that nobody is very keen to assume more risks than obliged and that everybody would be happy to transfer them to other parties. Also insuring risks is indeed just another means of transfering them, while gambling with the risks was at some time more used than it is today. The problem is thus simply the following one. Which is the best way to share the unavoidable risks between owners and contractors in order to optimise not only the project itself, but its overall economic impact, from a general point of view ? This means that not only the direct financial expenses for the project should be minimised, but that the total real investment should be reduced to a minimum. For the general economy it makes not much sense to reduce the nominal disbursements for a tunnel or similar works, while at the same time other costs are to be assumed by the community like costs of accidents, damages, or unemployment due to a too irregular working load, or even the consequences of the bankruptcy of the contractors involved. I know however very well that any attempt to solve such a kind of problem is a pure illusion ! The problem thus simplifies somewhat and spells : which is an acceptable, reasonable risks sharing policy ? CONTRACTING Finally, this is a question of the contracting methodology. For a number of years there has been a strong tendency to transfer the risks to the contractor as far as possible and at the end all the risks, including the ones raising from unexpected geological conditions. This tendency may be due to some former bad experience, but it is also favoured, by the increasing number of economists, layers or accountants assuming management duties in the owner's organisations, replacing often experienced engineers. To go that way is for the owners, and possibly also for the Engineer, an easy one, but it has already revealed some drawbacks. The first question raised is how long it will take until the contactors will include in their prices an adequate pre-
mium for the risks they are supposed to assume or to insure ? If additionally the contractor has to take care even of the financing of the project, the role of the owner will turn out to be a very pale one. I don't know whether many owners are really very keen to stay that much in the background. In case the project may count on an economic return, the second question which arises is thus : what do we need an owner for any longer ? Indeed, you may have noticed that worldwide an increasing number of contractors turn to become owners themselves, for example, if toll-highways or powerplants are involved. In doing so, they assume obviously in addition to the risks of operation, not only that of construction, but they manage to simplify significantly the procedures. I still believe therefore that in view of the real uncertainties and the remaining risk connected with any tunnelling activity, that an adequate way of sharing these risks must be looked for. To try to include into contractual documents an endless list of special clauses reflecting any possible combination of conditions suggested by the century-long history of tunnelling is for sure not the right solution. CONCLUSION In conclusion, one must start from the principles that in any case contracts must be net, simple, precise, short and fair. But, that in our field of activity they must must be also as flexible as the design and construction themselves are. Extreme legal and burocratic complexity should hopefully be replaced by an open and honest cooperation based on simple rules, always keeping in mind the limited predictability of the natural conditions under ground. To try to found absolutely crisp contractual clauses on a fuzzy data base, is very prone to lead to quite dramatic situations resulting in less than optimal solutions, causing high eco-nomic costs and additional delays, as it can already be observed in an increasing number of cases. In some occasions inadequate quality as well as risky operations were also observed. Due to ongoing legal procedures, such cases cannot be discussed nor presented here in a more detailed manner. The main conclusion however is that great improvements of the present contracting praxis need be achieved if successful tunnelling, as well as a reduced activity in disputes, claims and lawsuits are desired.
Dr. Eng. Ph D.h.c. Giovanni Lombardi, Consulting Engineer, Minusio, Switzerland
23
AITES
ITA
Topic
Economical Feasibility and Project Financing in Urban Areas
Author
G. Goggi
published
Le projet de rocade routire souterraine "Bastioni" Milan est un bon exemple des problmes de financement de projets en zones urbaines. Compte tenu de la trs forte demande de mobilit, la rentabilit financire de cette opration est assure et il peut tre fait appel au financement priv.
Meetings
Remarks:
5 ECONOMICAL FEASIBILITY AND PROJECT FINANCING IN URBAN AREAS

Le projet de rocade routire souterraine "Bastioni" Milan est un bon exemple des problmes de financement de projets en zones urbaines. Compte tenu de la trs forte demande de mobilit, la rentabilit financire de cette opration est assure et il peut tre fait appel au financement priv.
G. Goggi
BACKGROUND OF THE BASTIONI PROJECT Over the past years, as part of the debate on the urban planning and transportation network of Milan, several associations and individual technical specialists have intervened with proposals for the use of the Bastioni ring for the construction of an underground road. The proposed projects were extremely varied, with some stressing single elements and others studying the entire ring, but all of them were characterised by the intent to use project financing procedures. The Municipal Administration, stressing the obviously positive aspect of these proposals, decided to commission the Milan Underground in 1998 to study the "improved flow possibilities for the Bastioni ring" which also included, in the extreme case, the possibility of constructing an underground road. The study considered several scenarios, from the simple execution of several underpasses, to the construction of a complete tunnel around the center of the city. From the point of view of urban and transportation opportunities and of the possible benefits for the city, the hypothesis of a tunnel encompassing the entire ring was definitely the most meaningful. This project, in addition, presented the best characteristics for financing with private capital. Once the study was completed, the Administration took official note of it and made it available to all of those who wished to promote it, according to the procedure specified in Article 37 bis of Law 109/94. The project was also inserted among the priority works for which the possibility of secruring financing through project financing is foreseen. THE URBAN RENEWAL OBJECTIVES OF THE CITY The urban and transportation project The construction of a tunnel under the Bastioni (which constitutes a second flow axis, in addition to that at the surface) could permit the seizing of many opportunities for the functional redesigning and reorganisation of the city of Milan. The operations would not be limited to transportation aspects, but would obviously touch upon urban aspects and would develop greater benefits for the city itself with respect to the related urban transformations.
In fact, the area of the Bastioni is extremely important for Milan, as it is there that the fusion between the historic centre and the rest of the city takes place and it delimits the typical functions of the central area. For some time, plans for limiting private traffic have been discussed for the entire zone. The Municipal Administration is already planning to extend traffic limitations from the Navigli zone to that of the Bastioni, under the form of channelled traffic in loops, which has already been shown to be effective. In fact, the narrowness of the closed urban space, the lack of space and installations for interfaces, particularly for the mobility of private vehicles, work against the Navigli area. These negative aspects do not affect the Bastioni area, which would lend itself to an efficient organisation and management of interfaces leading toward the city center. Seen in this light, as an area of "castling" for accessibility to the center of Milan, the Bastioni ring looses its singular function of traffic ring to assume greater importance and urban complexity. In the proposal, therefore, many opportunities may be glimpsed, some of which will be directly addressed in the planned structures, while others may be pursued through secondary and parallel interventions. Direct opportunities The construction of an underground road frees up an enormous capacity of roadway flow, enough to liberates excess traffic from the surface roads and to permit rapid access to the various parts of the city. This leads to the creation of a ring which will sort all of the traffic arrives in the central area (to the historic center or transit traffic) and lead it to the access points for the final destinations. Thus, a notable speeding up of the traffic in this area and improved management of the accesses in the historic center will be obtained, especially if the traffic limitations in segments are extended to include the Bastioni ring. It will be immediately possible to obtain a consistent improvement in environmental conditions in the ring and in the entire center (it will be necessary, however, to keep this increased capacity from being filled by traffic from others zones ; this is possible by manipulations toll amounts).
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Linked to the construction of the underground road is the creation of public parking lots, private parking lots and strorage areas for activities which take place in the center. The advantages offered by these last two categories are obvious. The construction of private parking lots permits the reduction of the enormous space deficit for residential parking which especially exits in the historic center of the city, therefore extending its influence for several hundred metres outside of the ring, in zones densely packed with activities and residences. The availability of storage areas could permit the survival of commercial activity in the center, in a way that is compatible with current loading and unloading restrictions for merchandise. The construction of public parking lots, on the other hand, could transform the Bastioni ring into a large interface area facilitating access to the center, as stated previously, and for which examples exist in some European cities. This consolidation area for traffic headed for the center would permit an easy passage to pedestrian mobility and the use of public transportation, filtering all traffic which does not need to access the center by automobile. Therefore, an area of "castling" and filtering is foreseen, alive and thick with services and attractive landscaping, capable of transforming itself, more than at present, into a central part of the city. It is useless to present in detail to what degree the management of traffic limitations in the center would be efficient in this scenario (and how this scenario is not is opposition but is complementary to the need to increase and channel traffic into interface parking lots outside of the city). In the described scenario, the transformation of the current tramway line (29-30) is foreseen in a modern rapid circular tramway which moves on the external pedestrian or semi-pedestrian ring according to the models of Strasbourg, Grenoble, etc...). A mass, transportation system of this type, foreseen even if the tunnel is not constructed, has been recently inserted in the Mobility Plan and would be of great usefulness for Milan and permit a large increase in the functionality of the entire system. This line would furnish a large infrastructure to the interface ring (as does the Underground under the Bastioni in Brussels), also providing the possibility to link all of the parking lots and permitting pedestrian movement to and from the parking lots.
In addition, this line would cross each of the existing three underground lines twice, increasing the network effect and improving efficiency, as well as offering a powerful access system to the users which enter the central zone. Indirect opportunities The construction of an underground road would render redundant the use of the external ring of the Bastioni for traffic, since the surface capacity of the inner ring could absorb local traffic. Therefore, the possibilty of urban renewal of the external ring presents itself. This ring is the oldest and still offers a Milanese atmosphere worthy of perservation. It is possible to transform the external ring into an "environmen tal island", completely or partially pedestrian (for example, with access reserved for local residents and traffic). It is unnecessary to stress how this project complements that relative to the creation of the interface area along the Bastioni and enriches its functions. Additional related opportunities In the northern part, the Bastioni are close to the Underground line, especially near the Garibaldi, Republica and Venezia stations. The Bastioni axis, equipped as described above, could be linked with the Underground stations, for exemple using pedestrian tunnels equipped with people movers. In this way, the ring would profit from the direct accessibility to regional rail transportation arriving from the entire Lombard region and especially frome the provincial capitals. The tramway line could thus be easily linked to the Underground and offer direct urban service for users coming from these regions. Also, in this case, access to the city center would be enhanced, although with incerasingly extended traffic limitations, and the network effects of public transportation services would be maximised. Seen in this light, the underground Bastioni construction and the parking lots related to it, can be cited. Obviously, the entire entity of projects and interventions proposed cannot be included in a single project financing operation related to the Bastioni underground project. It will be a scheme related to other projects, some principally the financial responsibility of the public administration and others, the majority, able to be carried out with complete or partial funding form private sources. All of them, however, would be made possible through the main underground road project.
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CONTEXT OF THE PROJECT The project, developped by the Milan Underground (Metropolitana Milanese S.p.A.), offers the opportunity for new access not only for the 1,300,000 inhabitants of the city of Milan and the 3,500,000 inhabitants of the surrounding area, but for a much larger Milanese catchment area of over 7,000,000 inhabitants from the entire Lombard region. The Bastioni ring is approximately 12 km long, with the possibility of continuing in the Sempione Park. At the present, ATM data show how the double Bastioni ring is used by a large amount of traffic, particularly problematical in certain sectors, where during the morning rush hours over 3500 vehicles travel in each direction. In addition to the roadway tunnel, the underground space would be able to contain residential parking, functional areas for storage and distribution of merchandise, and for commercial and free time activities, thus becoming a reference point for new urban renewal projects. STRUCTURAL CHARACTERISTICS OF THE PROJECT The use of construction techniques for the creation of the underground axis using traditional excavation or mechanised excavation methods define two different solutions.The tunnel trace of both proposed solutions basically follows the internal ring of the Bastioni streets but abandons it to follow Ariosto and Pagano Streets underground. It then crosses the Sempione Park and rejoins it at the Bastioni di Porta Volta, resuming its internal trace. Tunnel using traditional excavation methods The solution including a tunnel using traditional excavation methods foresees the execution of a circular underground road for two way traffic consisting of two concentric one way tunnels with a maximum design speed of 60 km/h. Even though the proposal description involves the entire ring, the possibility of developing part as a first stretch should not be excluded. In addition to transportation questions, a historicalurban analysis assumed seven tunnel access points, corresponding to intersections with the main radial directions : P.za Oberdan - clockwise exit and anticlockwise entrance. P.za Tricolore. P.za Medaglie d'Oro - anti clockwise exit and clockwise entrance.
P.za XXIV Maggio - clockwise exit and anticlockwise entrance. P.le Aquileia - clockwise exit and anticlockwise entrance. V. Canova - clockwise exit and anticlockwise entrance. V. Melzi d'Eril - anti clockwise exit and clockwise entrance. P.le di Porta Volta - clockwise exit and anticlockwise entrance. P.za Repubblica - clockwise exit and anticlockwise entrance. The study has verified numerous constraints and interference with existing underground structures, such as the Underground ans railways lines, parking lots and main sewage pipes. These structures, in addition to the large size of the interchange structures, has rendered impossible the link with the surface capacity using complete intersections. However, the project foresees favourable exchange with the determined directions, which could be optimised following targeted investigations for the tunnel execution. The tunnel will be constructed using underground excavation for about 60 % and the remaining 40 % using the cut and cover technique near the interchanges structures. The groundwater table does not pose particular problems over the cut and cover stretches ; however, the underground stretches are in contact with the water table over a depth of 1 to 10 metres with a maximum of 22 metres. Particular problems arise concerning the crossing of the Underground line 2 at S. Agostino and in P.za XXV Aprile and the Underground line 3 in P.za Medaglie d'Oro. The junction in P.za Oberdan should be less critical, given the possibility of passing above the underground tunnels. The execution method foresees the construction of the first tunnel using tradionnal methods and the second, next to the first and separated by a common tunnel side, using repeated consolidation carried out from the first tunnel. This procedure, even though it is constructivvely complicated, has the distinct advantage of reducing interference with the foundations of the buildings. The interchanges - diamond shaped - are planned along the axis of the tunnel trace except in Canova and Melzi d'Eril Streets, because of existing construction. The typical interchange, particularly complex concerning the underground structures, foresees the construc-
26
tion of external ramps in the middle of the street and the coupling of the entrances and exits in order to reduce structures and interference at the surface. These works, carried out using the cut and cover method, permit the inclusion ot the technical installations for the functioning of the tunnel, such as installations for ventilation, exhaust gas treatment and fire fighting equipement, as well as parking places and storage areas for commercial activities in the excavated space. Structural safety will be guaranteed by pedestrian safety exists, emergency escape tunnels between the twinned tubes and by a management centre which will also be used for the management of toll collection. The project choice indicates the use of the tunnel for transit of automobiles and small trucks because of the prevalence of this type of traffic in the central part of the city. However, access will be possi ble for all types of vehicles, with the exception of oversized trucks and extremely high Pullmans. This choice permits a minimum vertical clearance of 4 m for the tunnels. The execution phases of the works will not be defined in detail. However, in the area of the cut and cover tunnel, displacement and refurbishing operations are planned for the underground installations, diaphragm walls and excavation down to the intrados of the tunnel roof, execution of the tunnel roof and reestablishment of surface traffic, ramp execution and completion of the excavation of the tunnels below the roofs. An approximate evaluation of the construction time through comparison with similar projects leads to a prevision of approximately 60 months and a cost of about 1,600 billion lire, which includes the costs due to expropriation and moving existing underground service structures.
Main tunnel Design speed Carriageway Right verge Left verge Roadway Max. desceding gradient Cross fall Mini. radius in plan Mini. concave vert.l curve Mini. convex vert. curve Vertical clearance 60 km/h 2 lanes 3.25 m wide 1m 0.5 m 8m 6% 2.5 % 300 m 1000 m 1500 m 4m Interchange tunnel 30-40 km/h 1 lane 4 mwide 1m 0.5 m 8m 7% 2.5 % 50 m 700 m 800 m 4m
Tunnel using mechanised excavation methods The proposed solution is very similar to that presented above concerning the trace and the relations with the surface capacity, however, the construction aspects, which use more advanced technologies, differ greatly. There are precisely 6 access points : P.za Oberdan - clockwise exit and anticlockwise entrance. P.za Tricolore. P.za Medaglie d'Oro - anti clockwise exit and clockwise entrance. P.za XXIV Maggio. P.le Aquileia - clockwise exit and anticlockwise entrance. P.le di Porta Volta - P.le XXV Aprile. Given the greater average depth of the tunnel and the greater rigidity of the interchange system with respect to the solution with traditional excavation methods, the number of exits is less. Consequently, connections with several junctions of surface capacity such as C.so Sempione and P.za Republica have been eliminated. The greater average depth leads to the fact that the twinned tunnels are located mainly under water, with the exception of some stretches of the northern ring. The constructive methods proposed foresee the execution of the tunnels with a full section tunnel boring machine and therefore require the elaboration of in depth studies with relation to the technology of the boring machine. The interchange zones, on the other hand, will be organised with transition stretches executed underground with construction methods of a more traditional type, followed by a zone where the parallel tunnels continue, constructed with mechanised excavation leaving space for an exit ramp which will be entirely constructed by the cut and cover technique in the central zone. In order to avoid settlements and cracks, even of the smallest degree, to the existing structures, it is good engineering practice to foresee a layer of undisturbed ground between the tunnels at least as thick as tunnel diameter. This would lead to a total section greater than 30 m, therefore greater than the roadway section at the surface. Consequently, one of the tunnels would be completely or partially under the lateral structures, resulting in obligatory expropriation of the underground. Another problem is the execution of all of the spaces for technical operations which lead to a further increa-
Table 1 : Principal project parameters for the solution using traditio nal excavation methods
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se of the section of the tunnel constructed with mechanised excavation. These difficulties limit the possibility of building the infrastructures connected to the road which needs to be constructed, if necessary for the financial equilibrium of the operation, outside of the Bastioni. However, this solution leads to a reduction in the impact of the work site and a reduction in work time. Concerning the interchanges, the type and insertion of the surface ramps do not vary with respect to the preceding solution. Also, the choice concerning the types of vehicles permitted to transit and therefore the minimum vertical clearance of 4 m remains unchanged. Also, in this case, the level, of study does not permit the definition with reliability of all of the parameters linked to the execution of such a complicated project. However, it is possible to affirm that, even though it is complicated, this construction method has definitely less impact on the surroundings than the previous one. The construction time would be shorter and has been estimated to be approximately 48 months. An approximate evalutation of the costs of the intervention including expropriation costs and moving existing underground service structures leads to an estimate of about 1200 billion lire.
Main tunnel Design speed Carriageway Right verge Left verge Roadway Max. desceding gradient Cross fall Mini. radius in plan Mini. concave vert.l curve Mini. convex vert. curve Vertical clearance 60 km/h 2 lanes 3.25 m wide 1m 0.5 m 8m 7% 2.5 % 300 m 1000 m 1500 m 4m Interchange tunnel 30-40 km/h 3.75 + 3.75 wide twice 1 m twice 0.5 m 8m 7% 2.5 % 50 m 700 m 800 m 4m
to 18 % of the total traffic of the city of Milan. 27 differents scenarios of representative situations were explored as a function of fares and tolls, the number and location of the access points, traffic limitations to the surface roadway network, as well as the protection of the tramway line. Concerning public transportation, the new underground road frees up surface space which could be used to protect the circular tramway line, which would permit a clear increase in the commercial speed of the public transportation. Through the execution of a new tram service, estimates foresee the possibility to double current use. Contemporaneously with the redefinition of the tramway line, the project plans for the rearrangement of the surface capacity through an enlargement of green areas, an increase of up to 4000 short-term parking places and the construction of about 6000 underground parking places. The results have lead to an optimisation of the numbers of users, travel time and revenue with a toll of 2000 lire, which would permit the use of the infrastructure by at least 23 % of the ring traffic. Economic feasibility and project financing The importance of the project investment costs and the technical and executive complexity make the advantages of the project financing instrument particularly interesting. The strong point of project financing is the introduction of the efficiency and efficacy of entrepreneurship in the field of public works, which makes the development of a project and construction management possible to guarantee the perfect respecting of costs and construction times. The project, in fact, is located in one of the most attractive sectors for the operations of project financing, but certain specifics exist in the Milanese area which greatly increase the attractiveness, namely : the pro capital revenue is among the highest in Italy and in Europe, the high demand for mobility, the high incidence of mobility demands for work-related reasons. In addition to financing certainty, project financing introduces the politics of road pricing to the Bastioni ring. In fact, the possibility of introducint tolls in certain urban roads is linked to the user's appreciation of the value of time saved, which is greater for travel time due to work-related reasons and especially in the case of self-employement.
Prof. Giorgio Goggi, Councellor for Transport and Mobility, City of Milan
Table 2 : Principal project parameters for the solution using mecha nical excavation methods.
CAPACITY AND PUBLIC TRANSPORTATION The study has previously looked at the planning of transportation systems in order to determine the priority axes foreseen for the connecting to the underground system. The urban and transportation aspects were supported by a careful simulation of vehicle flow carried out using the ATM model which assigns a transit traffic volume to the current state of the Bastioni ring equal
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AITES
ITA
Topic
Trans-European Transport Neworks: A Political and Financial Challenge
Author
E. Nowotny
published
La Banque Europenne d'Investissements joue un rle fondamental dans l'effort d'investissement en faveur des Rseaux Trans-Europens.La BEI met en place de nouveaux instruments pour favoriser les partenariats publics privs. Elle finance des tudes de faisabilit et ralise l'valuation de la qualit des projets proposs.
Meetings
Remarks:
6 TRANS-EUROPEAN TRANSPORT NEWORKS : A POLITICAL AND FINANCIAL CHALLENGE

La Banque Europenne d'I nvestissements joue un rle fondamental dans l'effort d'investissement en faveur des Rseaux Trans-E.uropen. La BEI met en place de nouveaux instruments pour favoriser les partenariats publics-privs. Elle finance des tudes de faisabilit et ralise l'valuation de la qualit des projets proposs.
E. Nowotny Vice-President of the E I B
The founding fathers of the European Community were convinced from the outset of the need to coordinate the Member States transport infrastructure policies. The national governments, however, were reluctant to relinquish their powers in this field in view of the key territorial importance of transport infrastructure. It was not until the early 1990s that Jacques Delors although in connection with the completely different issue of job creation succeeded in enshrining the principle of a common policy on major communications networks in the Maastricht Treaty. This set in train a series of initiatives which have had clear practical results. Over the past few years, the Member States have invested heavily in the transEuropean networks. The priority projects identified by the Essen European Council in December 1993 have for the most part already been implemented or are under way. For two of these the Lyon-Turin and Brenner schemes it is difficult to establish a completion schedule as their planning still has to be fine tuned. This concentration of activity has been facilitated by substantial Community support: the conditionality of Cohesion Fund grants and aid under the TENs budgetary line have undoubtedly had a considerable impact. However, it is the EIB, the European Unions financing arm, which has played the key role in this investment drive. Of loans of over EUR 73 billion approved by the Bank between 1993 and 2000, more than one third was earmarked for financing 11 of the 14 priority projects. On average, our contribution has amounted to a quarter of capital costs. Nevertheless, these efforts have failed to come up to actual requirements in either political or investment terms. Transport demand is growing more rapidly than the EUs gross domestic product. Since 1993, Europe has enjoyed sustained economic growth. Unlike the previous economic cycle, this has been reflected more by the acceleration of goods traffic than by the increased mobility of people. In fact, freight transport within the Union has expanded at a rate 50% higher than that of the economy. It is anticipated that the consolidation of European integration, especially with the accession of new member states, will fuel a similar transport boom. Furthermore, the
spread of e-commerce will increase the volume of small parcel traffic, creating extremely complex logistical challenges. As regards the mobility of people, there has been a sharp upswing in intercity travel, stemming in particular from flourishing trade and the explosion in the number and length of non-business trips, accompanied by the added complexity of movements. But the pace of investment still falls short of requirements Against this background, transport infrastructure investment figures reveal a gradual reduction in the percentage of GDP dedicated to this sector. Indeed, since 1992, the amount invested annually has remained in the order of EUR 70 billion, reflecting in part the constraints imposed on public spending as a consequence of monetary union. This curb on investment in a transport system already overloaded by escalating demand has inevitably led to greater network congestion, particularly around large cities where the situation is most complicated as well as on many sections of major trans-European routes. This deterioration in conditions was easy to predict. It is obvious that there is no miracle solution but also that, without considerable efforts in a number of fields, there is a great risk of widespread congestion jeopardizing the very essence of the process of European construction, which is based on social and commercial exchange. The question at present is how to confront the future. The first step is to integrate the trans-European dimension into national infrastructure plans, since it is ultimately the Member States which have to take the decisions and coordinate accompanying measures at national, regional and local levels. Our second preoccupation is the vital re-balancing of the various modes of transport, especially roads and railways. In this context, improving performance cannot be achieved by investment alone. Internationalisation of the European railway system and application of commercial criteria, leading immediately to the focusing of efforts on market niches where rail transport is competitive, are without doubt equally as important for the future of the railways as construction of new highspeed lines and elimination of bottlenecks.
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6 TRANS-EUROPEAN TRANSPORT NETWORKS : A POLITICAL AND FINANCIAL CHALLENGE
This takes us on to a third major concern: the introduction of a pricing system reflecting actual costs incurred by transport contractors. This calls for heavy investment in research and development of new technologies making it possible to identify reliably services and users, whilst respecting travellers privacy. The technological foundations are already in place, and the EIB, having launched its i2i programme in support of innovation in the wake of the June 2000 Lisbon European Council, stands ready to offer the industry financing terms geared to its R&D endeavours in this field. KEY ROLE OF THE MEMBER STATES IN SHAPING NETWORKS A decisive factor in implementing, and hence financing, major transport infrastructure schemes is the long lead time for preparatory work, construction and full commissioning. These very specific temporal dynamics impact on decisionmaking, which in EU countries is constrained by far shorter and rather random electoral cycles in Europe as a whole. As a result, there are frequently major changes in relation to the initial project design. Such modifications, often linked today to environmental issues, affect the cost and duration of a projects implementation and therefore financing. In the case of transEuropean networks and, in particular, cross-border projects, these hindrances can lead to considerable delays, which have a knockon effect for the entire European transport system. An ana-
lysis of the state of progress of the priority projects shows that it is the international sections such as Alpine or Pyrenean crossings, obviously among the most costly which are slowest to advance. Thus, it can be expected that, in the absence of investment programming mechanisms binding upon the Member States, all scheduling will be called into question. ADVANDTAGES AND LIMITATIONS OF PUBLIC/ PRIVATE PARTNERSHIPS (PPPs) This lack of precision in infrastructure development is exacerbated by the hazy definition of the competitive situation in the sector. It makes it difficult to estimate the form and breakdown, between modes and users, of charges for infrastructure use as well as the taxes to be applied and, especially, the budgets that the authorities earmark for investment in this field. This information
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6 TRANS-EUROPEAN TRANSPORT NEWORKS :` A POLITICAL AND FINANCIAL CHALLENGE
shortfall determines the risks attaching to individual project performance, which are virtually impossible for private companies to take on without public-sector backing. Structuring the division of responsibilities for public works has in fact a very long history dating back to construction of the first railways. However, in the 21st Century, we live in a very different world... Present-day sophisticated financing techniques certainly make for improved risk evaluation and adaptation of tools to project needs, thus avoiding situations provoking the bankruptcy of public concessions, as was too often the case in the past. However, the downsides of PPPs must not be underestimated and, in current circumstances, it is difficult to imagine that these alone are able to meet the need for reviving investment in trans-European networks. In fact, in todays climate characterised by the omnipresence of the public sector in the transport field, private participation is justified only where the potential benefits to society in terms of efficiency of building and operating infrastructure are greater than the extra preparatory, negotiating and monitoring costs. VALUE ADDED BY THE EIB IN MOUNTING PROJECTS The EIB is introducing new instruments for promoting public/private partnerships through its Structured Finance Facility. This facility will enable the Bank to : extend its activities to providing guarantees to public and private promoters, make available piggyback loans including, where necessary, risk-sharing elements, accept subordinated debt, and even arrange derivative credit instruments for companies serving as a vehicle for large-scale projects or acquire stakes in the implementing companies arising from PPPs. To allow for the risk associated with these new types of financing, the EIB has decided to create a provision of EUR 750 million appropriated from profits over the 2001 to 2003 financial years to safeguard risk-sharing loans totalling some EUR 3 to 5 billion over coming years. It must be pointed out, however, that the deployment of such risk-taking financial instruments will have absolutely no impact on the Banks traditional activity, which consists of very long-term financing on conditions tailored to specific project requirements as regards interest rate, duration and provision of funds. This product range, complementing financing offered by commercial banks, will always remain a key tool for creating trans-European networks, inasmuch as it serves as a catalyst for both banking sector involvement and decision-making by the Member States.
The value added of EIB support also encompasses the design phase of projects. In addition to financing feasibility studies, the Banks own teams appraise the quality of project proposals from an economic, financial, technical and environmental point of view. This activity, grounded in the experience acquired by our experts in countless projects both within and outside the European Union, is universally renowned. Such appraisal makes it possible to identify projects as viable and to prepare from the outset made-to-measure technical and financial solutions for long-term projects benefiting several generations. CONCLUSION The development of trans-European transport networks is essential but should be carried out in tandem with a series of complementary measures aimed at : further opening up the sector to competition, applying charges to users better reflecting actual costs, hence incorporating external costs, making extensive use of intelligent transport systems to enhance the perf o rmance of pricing a rrangements and logistic chains, integrating the environmental dimension at strategic level, ensuring the necessary internal cohesion and integration with the EUs neighbouring countries. To achieve this parallel development of infrastructure and optimisation measures, the investment downturn in the transport sector must be reversed in the immediate future. Private capital contributions could alleviate the additional burden of this investment drive on public budgets, but a really significant impact can be secured only by adapting the legal and administrative framework for PPPs at European level. With a view to channelling these initiatives, the European Investment Bank stands ready to make a major contribution to building up a modern, efficient and enduring transport system for Europe.
Austrian, born in 1944, Ewald Nowotny is Professor of Economics and has been a Member of the Banks Management Committee since 1 September 1999. He is Vice-President of the Euopean Investment Bank and his responsibilities on the permanent executive body of the EIB include the development of Trans-European Networks and economic and financial studies; he is also responsible for the supervision of financing operations in Austria, Sweden, Finland, Iceland, Norway, Turkey, Slovenia and the Balkans.
31
AITES
ITA
Topic
Financing the Lyon-Turin Link or the Gradual Revelation of a Firm Conviction
Author
M. Rivoire
published
Ds 1991, les comits de promotion franais et italien de la liaison ferroviaire Lyon-Turin proposrent de travailler sur un financement mixte public-priv. Leur conviction tait que seul un financement mixte permettrait de raliser d'un seul coup et dans les dlais le projet.
Meetings
Remarks:
7 FINANCING THE LYON-TURIN LINK OR THE GRADUAL REVELATION OF A FIRM CONVICTION

Ds 1991, les comits de promotion franais et italien de la liaison ferroviaire Lyon-Turin proposrent de travailler sur un financement mixte public-priv. Leur conviction tait que seul un finnancement mixte permettrait de raliser d'un seul coup et dans les dlais le projet. M. Rivoire
M. Rivoire
When, in 1988, the project for a new transalpine railway link between Lyon and Turin began to take shape, it was orginally a project inspired by highspeed rail for passengers, with the development of a European network as a backdrop, aimed to provide important cities and capitals with rapid, ecological and economic links from centre to centre. The need for a new mixed traveller and goods infrastructure to improve the efficiency of the French and Italian networks, became apparent as the preliminary studies progressed and was encouraged in particular by the two regions most concerned by the project, Rhne-Alpes and Pimont and by the two promotion committees bringing together economical and political forces on both sides of the border. It is true that the period previous to this, had been characterised by intense road investment in the Alps : Brenner, Gothard, Grand Saint-Bernard, Mont-Blanc, Mediteranean coast, and at the same time by a strategy, adopted by the French and Italian railway operators, aimed almost entirely at passenger travel. Thus, the share of freight rail ke pt fa lling despite Switzerlands efforts to anticipate a policy of intermodality whenever negociations touched upon standardization with the European Union. The new Lyon-Turin rail link, classed in 1994 as one of the fourteen priority European projects, is based on three pilars : Economical : because it allows the opening up of markets and offers a level of capacity, effiency and regularity which brings back an obvious competetive advantage to the rail solution. Ecological : because it corresponds to the communal effort to propose sustainable development for the Alps. European : because from the North to the South and from the West to the East, the new infrastructure which eliminates the alpine barrier, is part of the process to integrate the Eastern countries - which are in the proce ss of be co ming m em be rs - into the European Union and establish a balance between Northern and Southern Europe.
The raylway network : existing and possible, 1996
existing line unused line high-speed railway line under construction passenger line freight line mixed line
The financing must therefore reflect these realities, in the same way as it must accept external constraints which, when a project takes 25 years from design to finish, are inevitably changeable. > Therefore, in 1991 the French and Italian committees proposed working on the theory of a mixed public-private financing on the basis of two facts : for such projects, which have an impact spaced out over time, it is fairly unrealistic to opt exclusively for cash return. This acknowledgement was soon corroborated by the Channel Tunnel experience, which furt h e rm o re has become a bit too much of a caricature. As regards their budget, governments and public authorities have too little room to maneuver to
32
provide public financing alone. This acknowledgement was also corroborated by a difficult budgetary situation in the context of the 85/93 crisis. > And by meeting an objective : A project designed and undertaken in partnership in an industrial logic of productivity and economic efficiency, is more likely to meet clients demands and therefore to be profitable either directly, by bringing re t u r n on the capital invested, or indire c t l y, by replying to socio-economical and enviro n m e n t a l objectives and long term strategies. A c c o rd i n g l y, numerous work meetings or studies were devoted to this line of thought, notably on the French side where a study, carried out in 1996 by Coopers & Lybrand consultants for the Transalpes Public Interest Group, had underlined the advantages of a concessionary infrastru c t u re system for the financing, construction and operation of the French part of the Lyon-Turin link, by confirming the feasibility of mixed financing and of a major contribution f rom the private sector for projects divided into phases (40 % of public funding with no return for an intial programme of 1.25 billion euros, value 1996). Of course, this study brought to light the need for clear and firm guarantees from the public authorities, recalling notably the example of Eurotunnel. The study also backed up another study, carried out in 1993 by the Laboratory of Transport economics in Lyon for the Transalpine committee which had stressed that a mixed solution attracts a greater number of potential partners and therefore makes it easier to find the necessary funds, leaving the local authorities to provide funding via direct subsidies and subordinate advances. The creation of the RFF (Reseau Ferr de France) and its particular status determined by the law, was a p retext to avoid considering the option of mixed financing (in the public-private sense of the term) for the French part of the link. Indeed on the French side, the 1998-1999 period was devoted to a few exchanges between the government, the RFF and the national authorities, to outline a financing plan based on an initial contribution from the RFF, caluculated according to the infrastructures toll revenue and a further contribution from the SNCF on account of a productivity gain. The remainder (about 75 to 85%) was to be shared out between the French government, the European Commission - within the framework of the financing of priority projects - and the national authorities. In this game, the poker liar
strategy, given the lack of a strong political decision, was widely used ! The political decision, which had become even more essential following the dramatic accident of March 1999 in the Mont-Blanc tunnel, was made easier when the Transalpine committees brought two new perspectives to light.
Alpine mountains Road trafic (88) 98 in MT Rail trafic (88) 98 in MT (Figures before the closure of the Mont-Blanc tunnel / in 2000, about 26 millions tonnes of heavy goods vehicles used the Frejus tunnel)
The first perpsective concer ned the Market : a Franco-Italian working group was set up, bringing together road logisticians and haulage contractors to define the economical conditions for a transfer - or of a growth transfer - from transport by road to transport by rail, in a logic of intermodality, in other words, a logic of intelligent complementarity between the two transport methods. This transfer underlies improving productivity and efficiency and therefore creating a source of revenue, leading to a return on the capital invested in the new intermodal infrastructure. The second perspective concerned how to finance the project ; on the initiative of Mr Raymond Barre and Mr Sergio Pininfarina, a working group was set up bringing together industrial groups and financiers to prove that a purely public approach was not inescapable, as the stru c t u re would not be pro f i t a b l e enough to attract the private sector. The determination to prove that a mixed public-private financing was the answer to operating methods pre v i o u s l y evoked, seemed important, notably for the internatio nal section of the project (including the base tunnel, about fifty kilometres long), for two specific reasons :
33
it was impo rta nt to ga in the support of the European Union which had clearly indicated its preference for public-private partnerships in import a n t European projects and in doing so, benefit from the 20 % subsidies, by no means insignificant for the projects balance. it was important to avoid falling into the trap of a project, well designed and efficient on the whole, yet jeopardized uncertainly due to fund availability. This would make it impossible to meet the fundamental objective of environmental and industrial efficiency when in service. Indeed, both committees were convinced that the project had to be carried out in one go and in the shortest time possible and that only a mixed financing would make this possible. They just had to prove the advantages of such financing before the two governments came to a decision on the projects schedule at the Franco-Italian summit on the 29th January 2001. The working group, bringing together San Paolo IMI, the French and Italian deposit and consi gment offices, the Caisse dEpargne banks from the RhneAlps and Pimont dpartements, Deixa and the European Investment Bank, concluded that the project was feasible on the basis of no-return public funds accounting for 60% and an agreement on clearly fixed guarantees, for a total investment of approximately 6 billion euros.
The South European high-speed raiway network following the summit, 29 th January 2001
invested capital in the same proportion of 40/60. The contribution of the working groups, widely supported by the local authorities and economical institutions, allowed the different governments to make a clear decision at the Turin summit : a global alpine project from Lyon to Turin, an intermodal project, a project to be carried out between now and 2015, innovative financing. The European Commission welcomed this decision, underlined the projects urgency and fixed a funding level at 20%. The recent accident in the Gothard, while dramatic, highlights once again the extreme fragility of current alpine crossings and the urgency for concrete measures, including the solution of new infrastructures. Switzerland has firmly undertaken the construction of two high capacity railway lines with the Ltschberg/Simplon (operational in 2007) and the Gothard (operational in 2012) ; The French and Italian ministers recently confirmed their intention to open Ly o n - Turin for 2012. It is an ambitious goal and increases the need for a mixed financing. Ten years to bring a conviction to life ! N.B. : The studies referred to are available on the documentary collection provided by Transalpes au L a b o r a t o i re dEconomie des Tr a n s p o r ts - Ly o n National Ecole of Public Works - Vaulx en Ve l i n . www.transalpine.com (click on documentation).
Michel Rivoire is executive director of the Committee for the European Trans alpine link Lyon-Turin. Descriptive sheet Lyon-Turin New 300 km long railway line, high capacity, goods and passenger, between Lyon and Turin linking the French, Spanish, English, Belgium, Dutch, and Italian (including the high-speed railway lines from Naples to Milan and from Turin to Trieste) high-speed and freight networks. Performance capacity : 60 M tonnes of goods/year via the Alps, instead of the 10 MT today,
approved line line under planning
completed line line under construction
1 1/2 hours between Lyon - Saint-Exupry and Turin instead of the 3 1/2 hours it takes today: Paris - MIlan in 3 1/2 hours instead of 5 3/4 hours it takes today, estimated cost : 11 billion euros for 300 kms of new twintrack lanes, 120 km of which will run through tunnels : 5 billion euros for the central crossing, date for entry into service : 2012 (the lines via RomeM i l a n - Turin and Sevilla-Madrid-Barc e l o n a - Lyon will be completed by the end of 2005).
At the same time, the study awarded to the Federal Ecole Polytechnique of Lausanne by Transalpes gave an idea of the expected revenues from passenger and goods traffic (based on fiscal and tariff regulations in the Alps) which would allow a re t u rn on
34
AITES
ITA
Topic
Financing of the Eastern Distributor Motorway in Sydney
Author
MIG
published
Le "Eastern Distributor" Sydney est une portion d'autoroute de 6 km comprenant un tunnel de 1,7 km. Cet ouvrage a t financ par le groupe MIG qui a acquis 73,4 % des parts. L'article fait le point sur les particularits et la structure mises au point pour financer ce projet d'un montant de 700 millions de dollars australiens.
Meetings
Remarks:
8 FINANCING OF THE EASTERN DISTRIBUTOR MOTORWAY IN SYDNEY

The "Eastern Distributor" Sydney est une portion d'autoroute de 6 km comprenant un tunnel de 1,7 km. Cet ouvrage a t financ par le groupe MIG qui a acquis 73,4 % des parts. L'article fait le point sur les particularits et la structure mises au point pour financer ce projet d'un montant de 700 millions de dollars australiens.MIG
The Eastern Distributor The Eastern Distributor links Sydneys central business district with Sydney Airport and the southern and south eastern residential districts. It opened in December 1999, eight months ahead of schedule. This 700 million$ (460 million US$) is Sydney's most ambitious road link since the harbour bridge and will provide a major link from the Central Business District to the airport as well as to the eastern and southern suburbs. The new 6km long motorway includes a 1.7 km stretch of tunnel which is approximatively 30 metres underground. Up to 30,000 vehicles are expected to use the road each day, and pay a 3$ toll. Background to MIGs stake in the Eastern Distributor On 15 August 1997, MIG* acquired 73.4% of the issued units of Airport Motorway Trust giving it a total direct interest of 73.4%. At the same time, MIG subscribed $71.55 million for converting subordinated debt issued by the Airport Motorway Group (AMG) and also entered into an agreement to subscribe a further $71.55 million in one years time. In June 1998 MIG sold a share of its investment to MTAA taking its holding to 68.4% of the shares and units in the AMG entities and subordinated debt of $133.286 million. On 13 December 2000, MIG acquired an additional 2.95% stake in the AMG for a total consideration of $15.7 million. This took MIGs total equity interest in the AMG to 71.35%. This transaction resulted in MIG owning securities with a majority of the voting power and the acquisition also resulted in MIG gaining majority representation on the boards of the AMG. Financial Structure The AMG is structured both as a trust and a company. The trust is the financing vehicle through which funding is provided to the company to build and operate the toll road. Investors hold stapled securities, combining units in the trust and shares in the company. The cash returns on this investment are in the form of both dividends
from the company and distributions from the trust. Under the Income Tax Assessment Act of 1936, the income generated by the Trust is not liable for income tax, provided it is fully distributed to stapled security holders. As a result, distributions from the trust are only taxed once, in the hands of investors. Summarised below is the financial structure at financial close.
As the project matures and its cash flows become more certain, opportunities arise to refinance the investment to the benefit of equity holders. Capital markets provide financial instruments that allow refinancing of the existing debt with cheaper debt more suited to the projects cash flow profile. Refinancing can take the form of repaying the existing debt and replacing it with longer term debt, thereby producing earlier payouts to equity holders. Alternatively, it may be possible to renegotiate more favourable terms on the existing debt facility. The refinancing of the M5 Motorway is an example of this type of refinancing strategy where debt costs were reduced and equity distributions brought forward by 10 years. The M5 Motorway Refinancing The following graphs show the application of funds pre and post the debt refinancing.
35
8 FINANCING OF THE EASTERN DISTRIBUTOR MOTORWAY IN SYDNEY
Application of Funds Before Refinancing and Duplication.
Application of Funds After Refinancing and Duplication
It is expected that some form of debt refinancing will be applied to the Eastern Distributor after the project reaches a level of maturity. Active financial re-structuring will serve to support the necessary funding for the project while ensuring appropriate levels of returns to equity holders. Refinancing is expected to make a significant contribution to growth in the value of the asset.
MIG is one of the largest listed infrastructure investors in the world. Listed on the Australian Stock Exchange in 1996, MIG is now a top 30 company, with assets in Australia, UK, Europe and North America. The Concession period runs to 2048 and tolls increase at greater of 4.1% per annum or inflation, whichever is the greater. The Eastern Distributor represents 17.3% of MIGs portfolio and at 30 June 2001 this interest was valued at A$382.0 million.

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TRIBUNE n20 - ITA-AITES - December 2001

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