“CREATIVE SOLUTIONS TO PPP RISKS” Presented by: Jeremy Terndrup & Vyacheslav Andriyko

1. “CREATIVE SOLUTIONS TO PPP RISKS”Presented by:Jeremy Terndrup & Vyacheslav Andriyko

2. What is PPP? Public Private Partnership (PPP) is an alternative to standard public sector procurement of capital assets by ‘up-front’ payment. PPP can be described as, “An agreement between a Public and Private Entity in which a Private Entity delivers goods or services under the Public Entities Regulatory Authority for a financial return.” A typical PPP structure involves the creation of a single stand-alone company/business financed and operated by the private sector. The purpose is to create the asset and then deliver the service to the public sector in return for payment equal to the service levels provided.

3. New concept? • UK first to develop the PFI concept as is known today, but….. • the concept of a working partnership between the private sector and public bodies is well established. Compagnie Generale des Eaux, launched in 1853 and the founders of the Veoila Environment, was contracted to supply water to the city of Lyons. The company was awarded a 50 year contract to supply water to Paris in 1860.

4. PPP Model – an example The consortium company joint venture model Government Customer Operation Finance Construction investor Services delivered in return for annual charge Equity and sub debt finance Facilities mgmt (FM) investor Procuring Authority/ Public Agency, and ongoing users of public services Special Purpose Vehicle Unitary charge payment 3rd party equity investor Carried out under contract Debt finance Debt investor Construction contractor Facilities mgmt (FM) operator

5. Why is PPP needed? There are 2 key objectives in commissioning a PPP Project • Maximise value for money (VFM) of providing service over a long timescale of 20-30 years or more having taken account of all the risks. Maximising efficiency and innovation is key to achieving VFM. • Enable public sector to procure services in a manner consistent with economic policy; in particular where public sources of funding are lacking/in short supply.

6. Benefits of PPP • Relieve Public sector cash constraints • PPP allows public and private sectors to concentrate on activities that best suit their respective skills • Procurement efficiency • Improved accountability • Risk management • Enhance quality and quantity of infrastructure

7. UK PPP/PFI experience • The Private Finance Initiative (PFI) was launched by UK Treasury in 1992 • Applied to a wide range of projects (road, rail, tram, rail, airport, hospital, IT, telecoms, water, sewage, military, prisons etc) • Now accounts for 10-15% of public services budget • 630 UK PFI projects • £40 billion investment • UK model is being applied (in modified forms) throughout Europe

8. PPP/PFI Credentials – some examples • Home Office HQ PFI project in the UK - value £311 million • Sydney Harbour Tunnel project – first major transport PFI in Australia • Cyprus Airports BOT project – scheme closed 20 years after first mooted, reserve bidder stepped in • A41 France motorway PPP project– 55 year tenor worth €941million • Port of Miami Tunnel (POMT) and access improvement PPP project – value $1 billion

9. Design Build Finance Operate (DBFO) Build Operate Transfer (BOT) Long Term Lease Agrmnt Build Own Operate (BOO) Private Contract Fee Services Other Innovative PPPs Design Build Design Bid Build Responsibility

10. The Insurance Schedule and Insuring Clauses within the Concession and Loan Agreements • The Minimum Insurance Requirement Schedule within Concession and Loan Agreements details the “required” insurances to be procured during the phases of the project e.g. construction and operational • The Schedule defines the operative cover, policy limits, levels of deductible, principal extensions and exclusions based on prevailing insurance market conditions • The Schedule contains a Broker Letter of Undertaking (BLU) providing undertakings on behalf of the placing Broker • The insurance clauses define the regime and mechanism under which the required insurances operate for the Project period

11. Construction Period • Construction “All Risks” • Construction “All Risks” Terrorism • Advanced Loss of Profits (Soft Costs/Delay in Opening) • Advanced Loss of Profits Terrorism • Third Party Public Liability • Statutory Insurances (Workers Compensation/EL - not co-insured) • Professional Liability (Design and Build - not co-insured) • Pollution Legal Liability • Auto Liability • Performance Bonds Key PPP Project Insurances Insurance requirements on a co-insured basis during the construction phase

12. Key PPP Project Insurances (cont’d) • Operational Period • Property Damage “All Risks” • Property Damage “All Risks” Terrorism • Business Interruption • Business Interruption Terrorism • Third Party Public and Products Liability • Statutory Insurances (Workers Compensation/EL - not co-insured) • Pollution Legal Liability • Auto Liability • Depending on the nature of the project, there may be a requirement for • specialist project related insurances e.g. Aviation, MARINE, Professional • Liability (operational) Insurance requirements on a co-insured basis during operational phase

13. Why are these insurances required? • They protect the Public Agency, SPV, Lenders and other parties with an insurable interest in respect of • physical loss or damage to Project property/assets • earnings and additional costs of the SPV in respect of the above • incurred Third Party Legal Liabilities (bodily injury and property damage) • Without insurance the SPV could not accept the financial consequences of such risk events occurring

14. Role of Insurance • Means of Risk Transfer; SPV is constrained to a much greater degree in terms of manner in which it can adopt its business to prevailing risk environment. Insurance is a tool used for the transfer of risk. • Coverage will generally be bought on a wide basis with low deductibles to ensure minimum risk is retained at SPV level. • Project Insurances relied upon by main project related parties as a key mechanism for the management of risk.

15. Why is the insurance regime under PPP different to standard procurement? • The Public Agency, Lenders and others with an insurable interest sit inside the insurance mechanism as a co-insured taking direct benefit for their separate insurable interest • Insurances to be procured on a project specific basis (in the main) and not derived from parent company programme. • Public Agency guidelines and Lender requirements seek to ensure specific conditions are in place defining the duties of the parties to the Project in terms of the operation of the ‘required insurances’

16. What are the key conditions of a PPP insurance regime? • Non vitiation protection (Multiple Insured Clause) • Waiver of subrogation (Multiple Insured Clause) • Separate policy • Waiver of disclosure of material information • No obligation for premium payment • Additional insured • Control of claim monies (Loss Payee) • Notification of change in cover • Notice of cancellation and subsequent step in rights of various parties to the Project

17. PPP Insurances –considerations & solutions • Relief Events and Force Majeure • Premium increases– who bears the risk? • Insurance market capacity and market participants • Uninsurability • Excesses/Deductibles – who pays? • Bid costs – funding bid process = sunk cost, which can amount to $ million per project • Meeting bid/tender requirements - what level of information is required – insurance proposals must remain “fluid” and negotiable until final design and construction timetable is known • Cost of insurance – provision for cost of insurance in the Financial Model; prevailing market cost + contingency amounts

18. PPP Insurances – considerations & solutions • Phased completion timetable • Overlap of ALOP/BI • Pre-existing property • LAD interface with ALOP • Latent Defects • Environmental/Contamination issues • Contractor’s plant and equipment • Terrorism risk • Marine/Transit

19. PPP Insurances – considerations & solutions Premiums – Who bears the risk? • Firm Pricing – Is it achievable? • Alternatives: • Cap and Collar premium movement mechanism • Firm Price [X] years + RPIX thereafter • Benchmarking annual pass through cost • Public Agency Related Claims increasing premiums. Who bears this risk how is it stipulated within the Concession Agreement?

20. PPP Insurances – considerations & solutions Insurance Market Capacity • Size and nature of risk exposures • Market security issues • Importance of quality risk data • Number of Market participants

21. PPP Insurances – considerations & solutions Uninsurability • Uninsurability • Definition of trigger of Uninsurability – what is the test? • What happens to the risk if it becomes uninsurable (Termination/Public Agency “insurer of last resort”)

22. PPP Insurances – considerations & solutions Deductibles – Who pays? • Public Agency accepts no liability? • Public Agency liability for Public Agency default and/or negligence only (Public Agency Related Claims) • Must link to general Indemnity provisions

23. What does this mean for the project insurances? • Contractor/Lender uncertainty over “the risk of insurance” – cost and availability • Fear of the unknown from insurers on contractual requirements of PPP • No establishedinsurance market experience of some risk exposures through PPP contracts • Unpredictable insurance market cycles • Sector specific claims impacting on competitive terms and also cost provision in Financial Model • Short term underwriting stance for both cover provision and pricing

24. PPP Project Insurances – working examples • Project Insurance Package – making the package fit with the contractual obligations and the financial model to the Lenders and Government Agency satisfaction • Structure of Project Insurance Package where project “affordability” is an issue • Covering off unidentified risks through an insurance solution to ensure “bankability” of project • Utilisation of premium efficiencies via Annual Insurance Programmes

25. An Introduction to PPP Questions?