Question
Please answer the following questions for the Irish Schools Case 1.What are the most significant risks of the project? How should they be reflected in
Please answer the following questions for the Irish Schools Case
1.What are the most significant risks of the project? How should they be reflected in the valuation?
2.Valuation issues:
a.What level should the unitary payment be to give a fair return to the investors, and to the equity sponsors?
b.How much would you pay for a 10% equity stake in the project?
3.Show the sources and uses of funds for the first three years (2010-2012).
4.Evaluate how much set-up costs (excluding financing costs) were relative to total investment.
5.Financing issues:
a.What were the benefits of having the EIB involved?
b.What is the impact of leverage on the rate of return for equity?
c.What were the benefits of equity financing via subordinated debt instead of straight equity?
Private Provisioning of Public Goods
The building of schools generally falls within the remit of government, in the same way that government is responsible for the provision of public goods like hospitals and roads. However, in 2005 the Irish Department of Education and Skills (DoES) announced a new public-private partnership (PPP) programme involving the private construction and operation of 27 new schools in Ireland, to be rolled out in five bundles. Bundle 1 was opened to tender in November 2005, and won by a consortium, Macquarie Partnership for Ireland (MPFI), comprising Macquarie Capital Group and Pierse Contracting. It reached financial close in March 2009.
In June 2009, Bundle 2 ? a project to build six schools on five sites in Ireland under a 25-year Design, Build, Finance and Maintain (DBFM) concession was ? put out to tender. MPFI, this time comprising Macquarie, Pierse and John Sisk & Son Ltd, was one of three bidders shortlisted, the two other consortia being Robertson/Bennetts/AIB Equity, and Bilfinger Berger/Barclays/Hegarty. MPFI was announced the preferred bidder in September 2009.
The winning bid put construction costs at ?81 million, with a financing plan consisting of ?102 million in debt ? ?90 million in senior debt and a ?12 million equity bridge facility, which would ultimately be replaced by the proceeds from ?12 million in subordinated loan notes to which project sponsors would subscribe once construction was completed. A 25-year inflation-linked annual unitary payment from the government was the sole revenue from the project.
By taking over the government?s role in providing a public good (schools), MPFI had to reconcile the needs of the public with its own equity return requirements. What level would be required for the unitary payment to ensure that it covered its operational costs, debt service, and return on equity? Furthermore, how should MPFI take into account the mounting debt crisis in Europe? Governments in developed countries were generally considered credit worthy, and projects underwritten by them (e.g. through unitary payments) were rated as low- risk and viewed to all intents and purposes on par with government credit risk. But with government deficits in Greece, Spain, Italy and Ireland reaching alarming levels, had this risk been priced in, and how?
Social Infrastructure and PPP
Schools ? or more accurately school buildings ? are part of a country?s infrastructure, that is, the large-scale capital assets which provide facilities and services essential to the functioning and development of the economy and society. Infrastructure can be split into two broad classes (see Appendix 1): 1/ economic infrastructure, such as roads, railways, ferries, bus and light rail facilities, bridges, tunnels, airports and ports, telecommunications infrastructure, and utilities and waste processing; and 2/ social infrastructure, such as hospitals and other healthcare facilities, schools, universities and other educational facilities, judicial and correctional facilities, public housing and defence support services.
Traditionally, given its important economic role, infrastructure had been the sole responsibility of the state. In the mid-1980s to the early 1990s, however, the trend shifted
towards a partnership between the state and the private sector in the development and provision of infrastructure via Private Finance Initiatives (PFIs), which originated in the UK in 1992 under the John Major government. Since then, public-private partnerships (PPPs) had become an established model for governments internationally to provide infrastructure-based services involving clearly defined projects financed by the private sector.
Typically the public sector procurer would sign a termed contract with a special purpose vehicle (SPV) set up to hold the asset and provide the infrastructure service, which would subcontract the finance, design, construction, maintenance and soft services to companies that were often related to its shareholders. For providing these services the SPV would receive a series of revenue streams. At the end of the concession the asset would revert to state ownership.
In the case of economic infrastructure, revenue streams were usually generated from the assets themselves, through user-paid revenues such as tolls or user fees. For social infrastructure such as schools, hospitals and prisons, this sort of user-paid revenue was either not available or inadequate, being a ?public good? that either provided a free service or charged very low user fees. In this case the government would make ?availability payments? that would be paid regardless of demand.
The Irish Case for PPP
?A Public-Private Partnership is a partnership between the public sector and the private sector for the purposes of delivering a project or a service traditionally provided by the public sector. PPPs come in a variety of different forms, but at the heart of every successful project is the concept that better value for money may be achieved through the exploitation of private sector competencies and the allocation of risk to the party best able to manage it?
A Policy Framework for PPPs, Department of the Environment and Local Government, Ireland
In Ireland, PPPs were introduced on a pilot basis in June 1999, following recommendations made by the private sector in a report on PPP potential by consultants Farrell Grant Sparks (1998). Thereafter, PPPs were implemented and expanded by government at central and local level in the water/waste-water, social housing, road, light rail and education sectors.1 In research garnered from interviews and questionnaires with key players in Irish PPP projects including public-sector officials, local government officials and elected representatives, private sector PPP companies and consultant advisors, the principal reason stated for the introduction of PPPs by the Irish government was that they would address Ireland?s public infrastructure and service deficit more rapidly than traditional procurement methods alone. The government was also reportedly ?frustrated? with the slow delivery, inefficiencies and cost overruns of a number of public sector projects.
Previously, funding for building infrastructure in Ireland had largely come from the European Union?s (EU) Structural Funds, which were created to help regions within the EU where economic or social development lagged behind. In Ireland, Structural Funds had been used in the construction of schools, the provision of public transport and other social infrastructure, childcare, community and local development, training and employment schemes, adult and community educational programmes, and other projects with a clear social intent or outcome. Ireland had already received three rounds of Structural Funds ? in 1989-1993 (?3.7b), 1994- 2000 (?6.9b), and 2000-2006 (?3.7b)2. These acted as a complement to PPPs ? for example, over the period 2000-2006, ?3.7b of projects were funded by Structural Funds, and ?2.4b by PPPs.
In the latest round, 2007-2013, Ireland received only ?0.750b, as rapid economic progress meant that some regions no longer qualified for funding. The entry of Eastern European countries to the EU may also have meant that funds were earmarked for those lagging economies, leaving less for Ireland. As a result of the tapering off of the Structural Funds, along with historical underinvestment, there was an expanding deficit from Ireland?s public infrastructure and services.
The attraction of using PPPs for infrastructure building by governments was two-fold: 1) cost- savings through the introduction of innovations and efficiencies by the private sector, and 2) the accounting benefits of off-balance-sheet financing. PPP was estimated to enable cost savings of between 25% and 40% through the bundling of construction, operation and maintenance in a single entity.3 Instead of contracting out each stage to different entities, this arrangement provided strong incentives to make investments at the initial construction stage that would enable the reduction of life-cycle costs and the reaping of efficiency gains at a later operating stage. The flipside, of course, was the increase in monitoring costs by the government to ensure no slippage of service quality. The more complex the PPP and the longer the concession term, the higher the monitoring costs would be.
The off-balance-sheet financing aspect of PPP allowed governments to leave it out of their budget accounting so that they would not exceed the deficit threshold. Under the Growth and Stability Pact of the Treaty of Maastricht, to preserve European fiscal stability member states were expected to maintain both an annual budget deficit of less than 3% of GDP and public debt less than 60% of GDP.4 To monitor these levels, EU member states were obliged to prepare national accounts following a common format, the European System of Integrated Accounts (ESA 95).
The ESA 95 set out how PPPs were to be treated: the assessmen
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Personal Financial Planning
Authors: Randy Billingsley, Lawrence J. Gitman, Michael D. Joehnk
14th edition
978-1305887725, 1305887727, 1305636619, 978-1305636613
