UV1067 Dee. 2,2008 ATHENS RING ROAD (ATTIKI ODOS)' The Athens ring road (Attiki Odos) was conceived during the early 1960s, when the first feasibility studies began. Exhibit 1 shows a map of the proposed 65-km highway, crossing Athens from west to northeast. With increasing traffic and pollution in and around the city of Athens over the ensuing decades, the lhigihway was deemed a necessity. More important, it was seen as a critical way to win the bid for the 2004 Olympic Games and accommodate the transportation needs of the athletes and tourists during the games. The project presented two major challenges, the first of which was funding. A combination of high investment cost and Greece's high deficit” made the availability of governmental funds a scarce resource, making it difficult to fund the project. Second, the project ‘was very complex given that the construction of the highway, interchanges, and approximately 240 bridges and tunnels would have to be constructed in the urban setting of Athens and would involve numerous stakeholders, including 33 municipalities. Moreover, the road was considered technologically advanced, and its construction posed significant challenges, Finally, it was the first time such a large and complex project would be undertaken in Greece. In 1994, the Greek government appointed Yannis Papadopoulos as an adviser to evaluate several alternatives to source the project. The government wanted to begin construction work in 1996. Initial cost estimates ranged from (curos) EUR1 billion to EURL.5 billion. The Industry The term “infrastructure” usually referred to transportation and telecommunication systems, energy and utilities, as well as a variety of other sectors (e.g., schools, prisons, etc.) ' SAWiki” is the name of the prefecture in which Athens resides, and “odos” means road in the Greek language, * General government budget deficit was 10.2% of GDP and had to meet the EMU (European Monetary Union) convergence criteria of 3% GDP, limiting spending capacity, ‘This case was prepared by Minas Terlidis (Darden exchange student, Fall °07) and Professors Kenneth M. Eades and George (Yiorgos) Allayannis. It was written based on publicly available information and solely as the basis for classroom discussion rather than to illustrate effective or ineffective handling of a situation. Certain information (including protagonist’s name) has been modified specifically for this case study, is hypothetical, and does not represent the actual data of the project. Copyright © 2008 by the University of Virginia Darden Schoo! Foundation, Charlottesville, VA. All rights reserved. To order copies, send an e-mail to sales(@dardenbusinesspublishing.com. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmited in ‘any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Darden School Foundation.UV1067 Exhibit 2 outlines the main infrastructure categories, Investments in the sector were usually Jong-term, required large amounts of capital, and involved complex contractual agreements. Financing Capital-Intensive Infrastructure Projects The methodology most commonly used to finance capital-intensive projects was called project financing, and the field was called project finance.’ There were many definitions of project finance, but almost all of them had the following key characteristics: * The creation of a Special Purpose Vehicle (SPV)', a bankruptcy-remote entity that remained secure if the parent company went under. + The SPV developed and managed a project with a limited life (usually 20 to 30 years). * The cash flows generated by the project were used to repay debt, operational expenses, and provided returns to equity providers. + The SPV was usually highly leveraged (with debt at 80% to 90% of total capital). + Project financing included extensive and complex contractual agreements aimed at effectively managing risks. Each risk was allocated to the entity (public or private) most capable of managing it Sourcing Capital-Intensive Infrastructure Projects When the project was financed, developed, and operated only by the private sector, then it was referred to as private finance or Private Finance Initiative (PFI), An example of a PFT scheme was the nonrecourse 288-megawatt kerosene-fired simple-cycle power plant in Townsville, Queensland, Australia, owned by the AES Corporation? When the private and public sectors collaborated for these types of investments, they then were referred to as Public-Private Partnerships (PPP). An example of a PPP scheme was the Indiana Toll Road in the United States.° In addition, many projects have been developed with a collaboration of private and public sectors and grants from organizations such as the European Union, the World Bank, the Asian Robert F. Bruner, “Project Financing: An Economic Overview,” (UVA-F-1035) and Benjamin C. Esty, “An Overview of Project Finance—2004 Update,” (HBS 9-205-065). “An SPV was usually established as a subsidiary of a corporation with the special purpose of financing and acquiring specific assets. It was set up legally in such way that it cannot be affected by, nor affect, the credit- ‘worthiness of the parent company. * Kenneth R. Woodcock, “AES Raises $75.5 Million to Finance 288 MW Power Facility in Australia,” Business Wire, September 3, 1997. “US. Department of Transportation Federal Highway Administration, PPP Case Studies: Indiana Toll Road, bps/www.thwa dot gov/PPP/case_stucies_indianatoll.htm (accessed November 11, 2008),uvi067 Bank for Reconstruction and Development, and others. These were often termed “hybrid PPPs.” An example of such a scheme was the Athens ring road in Greece History of Project Finance and Investments in Infrastructure Project finance was first seen in the 13th century when the British monarchy recruited a Florentine merchant bank to help with the development of the Devon silver mines. The bank received a one-year lease for the total output of the mines in exchange for paying all the operating costs. The British monarchy had no recourse to tum to for compensation if the value or amount of the extracted ore was less than expected. Later, some of the first trading expeditions in the 17th and 18th centuries were financed essentially as stand-alone projects. Some of the earliest applications of project finance in the United States were in the railroad, natural resources, and real-estate sectors. During the 1970s, project finance began to develop into its modern form. partially due to several large natural-resource discoveries and also to soaring energy prices, Which led to the demand for altermative energy sources. In other words, one of the reasons that firms used project finance was because it would have been impossible to raise such large amounts on balance sheets with traditional corporate debt finance.” ‘The United Kingdom and Australia were among the first to regularly use modern project finance. During the 1990s, the private sector experienced strong growth in those two countries, ‘The United Kingdom established the PFI scheme in 1992 to involve the private sector in ‘managing its infrastructure projects. The scheme was successfull and has since expanded from traditional assets (roads, energy, etc.) to hospitals, schools, police stations, prisons, and others. Australia’s infrastructure field began in the early 1990s. Throughout the 1990s, Australian assets in the energy, transportation, and communication sectors were privatized. The Political motivation for these privatizations was the government’s need to reduce public deficit and improve its credit rating. Additionally, private companies had the appropriate incentives to manage projects efficiently and therefore would be able to provide better pricing to customers/users. Australia implemented a compulsory superannuation-contribution scheme, in 1992, which initially required employers to contribute 3% of an employee's base salary to the employee's pension savings. These savings had to find appropriate investment assets, and infrastructure assets, given their long-tetm orientation, were an excellent fit. Hence, pension- fund managers were key stakcholders in many of the infrastructure assets sold duting the 1990s, Australia’s infrastructure-investment market was considered one of the most established in the world, Demand for infrastructure assets quickly outstripped local supply, and experience gained during this process subsequently was exported to the rest of the world.* The prospects for the private sector seemed positive for a number of reasons. First, there ‘was significant population growth and urbanization, especially in the emerging markets. This Based on Esty * Colonial First State Global Asset Management, “Investing in Infrastructure —the Australian Experience,” Infrastructure Research Paper, November 2006.UV1067 urbanization fuelled a demand for infrastructure. Second, Australia’s success story highlighted by a 19.4% return for Macquarie Bank (a major Australian bank with strong presence in the sector) was a key promoter for attracting new capital. Third, and most important, there was a trend toward greater infrastructure privatization that was supported by many different parties. On the one hand the governments had found a new source of cash to finance their infrastructure needs. On the other hand, private investors, such as banks and pensions funds, had found new, long-term, solid returns and an inflation-linked asset class in which to invest. Finally, international agencies had found a tool that could bring poverty alleviation, economic growth, and social change.* Characteristics of Infrastructure as an Asset Class"” Infrastructure investments were characterized by long duration, natural inflation hedging, and steady cash flow. As shown in Exhibit 2, infrastructure included roads, bridges, dams, ports, airports, power generation and distribution, transmission of electricity, water and gas utilities, communications, and so on. Each sector had its own performance behavior, which was also closely tied to the stage of the assets’ lifecycle. Exhibits 3 and 4 compare mature infrastructure assets with other asset classes and early-stage infrastructure assets, respectively. Each infrastructure asset was unique; however, despite the differences, infrastructure assets had the following traits in common: * Monopoly: Infrastructure assets were typically large investments with high initial fixed- costs (airports, roads, etc.). These high costs deterred new entrants. In fact, in some cases, the contract specifically required that no other type of facility could be built within a certain radius, The reality was that infrastructure assets had few, if any, substitutes. * Inelastic demand: Infrastructure assets provided essential services to the community. These services could be considered essential (such as a port or a road), so the demand could be less dependent on the pricing for the use of the asset. * Stable cash returns: Given their monopolistic features and their more or less inelastic demand, infrastructure funds generally generated stable returns. Such stable cash flows allowed for the relatively high leverage that was encountered in those projects © Long duration: Infrastructure assets often lasted more than 50 years. Therefore, they were used to match liabilities borne by public and corporate pension funds. * Inflation hedge: Infrastructure was a tangible real asset and provided an inflation hedge. In an inflationary environment, the replacement cost of real assets increased, thereby protecting the vaiue of existing infrastructure assets. In addition, contracts often provided ° Based on Ryan J. Ons “Investing in Infrastructure: the Legacy & Lessons of Distressed & Failed Projects,” Collaboratory for Research on Global Projects, Stanford University: 2006. © Based on data in research paper by RREEF Rescarch, “Performance Characteristics of Infrastructure Investments,” August 2007.UV1067 for increased fees that were linked to inflation (¢.g., a toll road would increase its tolls in line with inflation many times), * Hybrid assets: Infrastructure shared many common traits with a variety of assets, including real estate, fixed income, and private equity. Athens Ring Road The proposed highway was 65 km long, with another 85 km for service/side-road networks and would cross Athens from west to northeast. It would have 32 interchanges and 179 bridges. There would be 63 tunnels and flood-protection works with a total length of 67 km. An area of 122,000 square meters would be required for reserved areas and supporting facilities, Once in operation, it would employ approximately 4,500 people. The project was expected to cost around EUR! billion to EUR1.S billion, with a six-year construction period, The cost of operations was expected to be 10% of annual revenues."! The revenues of the project were based solely on toll-collection fees. Users could either pay cach time they used the road, or they could subscribe to various payment programs depending on their needs. The government wanted to regulate the price and set up an inflation- linked price cap. Ownership-structure options The first task for Papadopoulos was to evaluate the alternatives for the ownership structure of the project, which, in turn, had direct implications on the financing strategy. There were four options to evaluate regarding the ownership structure. The first option was public ownership without the involvement of the private sector. A traditional toll/revenue system was followed, and responsibility for the design, construction, operation and maintenance, governance, etc., remained with the government; however, the government had to provide all the required capital and was responsible for such project risks as construction and revenue. The second option was public ownership but with private contracting, which was similar to the first option except that certain activities were contracted (e.g., design and construction). Even though this scheme allowed the construction risk to be allocated to other parties, the government had to relinquish some control of the project and had to bear all the financing costs. The third option was a concession agreement. Under this option, the Greek government owned the facilities and maintained governance but also entered into a lease agreement with a private entity that was responsible for operations, maintenance, and construction, In this scenario, most of the project costs were allocated to the private sector, and the government gave "' Case-writer estimates.UV1067 up some control of the project, Furthermore, the option allowed the allocation of risks to both the public and private sectors. The fourth and final option was private ownership. Under this scheme, all activities were controlled by a private entity. The Greek government had no financial obligations toward the project but also had no control. Exhibit 5 outlines the main similarities and differences related to the risk, control, and financing of these alternatives Main issues While evaluating the available options and structuring the deal, Papadopoulos had to consider several factors. First, Greece had a high budget deficit and needed to meet the European Monetary Union convergence criteria, making public financing of the entire project undesirable (see footnote 2) Moreover, the Greek government’s credit rating of BBB, granted by Fitch Rating Ltd., heightened the risk of the unavailability and high cost of public funds. Furthermore, the Greek government wanted to allocate some of the project risks to the private sector. But, it was clear from the beginning that the project required a great deal of help from the state. For example, the contractor would have to deal with 33 local municipalities. If a concession agreement was followed, it would be the first PPP deal in Greece, and would cause concem about the absence of legislation that specifically authorized PPP contracts. Still it was anticipated that, in this case, the Greek parliament would ratify the contract, Moreover, lack of experience in both the public and private sectors added to the complexity and uncertainty surrounding the project. Another issue was the difficulty of expropriating land in Athens—as opposed to expropriating in the countryside. The public sector had an obvious advantage in controlling this risk given that it had the legal power to expropriate. There were concerns as to whether large international construction companies would be interested in the project. The challenges of working in an unfamiliar urban setting could be a deterrent. An international construction company was necessary, however, because the local construction firms in Greece lacked experience with such a megaproject. At the same time, local knowledge was seen as essential in dealing with local communities, bureaucracies, and utilities. ‘The project attracted various potential investors, some of whom expressed concer about the cost of the project and a budget overrun: how to avoid one and who would take responsibility if that risk occurred. Moreover, potential investors were not confident that the predicted traffic level could be met and public demand for a ring road was strong enough. Estimated traffic peruvi067 day was estimated at 180,000 vehicles during the first year of operation in 2002 and was expected to rise annually by 10,000 vehicles. The capacity of the road was 220,000 vehicles. Proposed deal structure Papadopoulos considered all the issues and talked repeatedly with potential stakeholders. He eventually decided on a project-financing strategy with a financial structure of 67% debt (Exhibit 6). He estimated total construction and financing cost of the project at FURI335 billion and that the debt providers required an 8% cost of debt. Debt and equity would be raised as shown in the schedule of Exhibit 6 (assumed at the end of each year for simplicity), in accordance with cost expectations, Furthermore, the debt providers required that @ debt service coverage ratio (DSCRY" of 2.0 be maintained during the operating life of the project. A debt service schedule shown in Exhibit 7, was created to maintain the DSCR required (debt was first paid during 2002 when operating cash flows from the project were available) Revenue would be collected by charging a fee from each vehicle using the road. The weighted average fee per vehicle for use of the road was EUR2.90 in 2002 (the first year that the road was expected to be operational) and was to increase annually to keep pace with inflation, The revenue would first pay operation and maintenance expenses, estimated at 10% of revenue, and then the debt service, in accordance with the debt-service payment schedule. The remaining amount would be distributed to the shareholders as dividends, ‘The ownership structure that Papadopoulos proposed is shown in Exhibit 8, Commercial banks, alongside the Greek government and a consortium of construction firms, would finance the project. Papadopoulos suggested creating a new firm called Attiki Odos SA that would be responsible for the construction, operation, and maintenance of the road ‘The construction period was expected to last six years. Construction was expected to start at the end of 1996 and continue until the end of 2002. Hence, during 2002, some construction would take place while the road was operational, The length of the period that Attiki Odos SA would own and operate the road would be 22 years, at the end of which the project would come under ownership of the Greek government. Thus, the equity providers would receive their returns in terms of dividends for 22 years. The Greck state would receive a perpetuity (stream of cash flows) that would start when project ownership was transferred to the state. Papadopoulos was luncertain about an appropriate discount rate for the Greek state—6% to 8% sounded reasonable ‘o him, given the level of the real rate and an expected long-run inflation rate. Exhibit 9 shows Inflation in the past few years bad been more than 10% in Greece; however, in 1996, the CPI was around 8.296 and was expected to go down to less than 6% in the short run and as low as 3% in the long run as Greece was ‘aiming to conform to the EMU (common currency) convergence criteria "'DSCR (Debt Service Coverage Ratio) refered to the amount of cash flow available to meet annul payments on debt (DSCR = Net Operating lncome/Total Debt service).UV1067 major milestones on an Athens ring road, and Exhibit 10 provides a preliminary spreadsheet created by Papadopoulos.) Conclusion In 1996, Greek elections were approaching as well as Greece’s bid in 1997 to host the 2004 Olympic Games. Congestion, traffic jams, and pollution in the city of Athens as well as a tight financial policy that did not leave much leeway for public spending prevailed. There was chatter around town regarding the road and whether it would materialize or not. Although everybody did want a ring road, the real issue was whether it was smart to take on such a large, complex, expensive project because if the government financed and built it, the taxpayers had to take on the entire burden. But to have a private firm finance it meant that a private firm would own it and control the entrance to Athens, which made people unhappy. Papadopoulos had heard the chatter and was trying to gauge its potential importance as he prepared to present his recommendations to Greek government officials. He wondered whether the proposed concession structure would ensure the mitigation of all major risks. Were there any hidden risks that had not been addressed? Were the financial structure and returns, as proposed by Papadopoulos, attractive and realistic for both the private and public sectors? What types of investors would be interested in the project?UV1067 Exhibit 1 ATHENS RING ROAD (ATTIKI ODOS) Map of the Proposed Athens Ring Road Source: Microsoft and ease writer.-10- UV1067 Exhibit 2 ATHENS RING ROAD (ATTIKI ODOS) Infrastructure Categories Transport Energy/Utilities ‘Communications ‘Other | Roads Oil and gas storage —_| Cable networks. Education facilities | and distribution Bridges Cell towers Health care facilities Power distribution and Tunnels generation WiFi Judicial and correctional facilities Airports Water supply and Satellite, TV, radio, and Rail systems Harbors Ferries Bus and light-rail franchises wastewater treatment Renewable energy other systems Government accommodation Sports stadiums Convention centers Public housing Defense support facilities Source: Case writer.ai UV1067 Exhibit 3 ATHENS RING ROAD (ATTIKI ODOS) Mature Infrastructure Assets Potential Sectors Mature toll roads Risk-Return Characteristics + Power generation (mature) + Established revenues + Distribution and Transmission of gas/electricity * Yield dominates investment return + Regulated utilities + Higher average (40%-80%) + Established seaports/airports + Total retum expectations 10%-14% + Telecommunications + Water Private Equity Opportunistic Real Bstare Mature Fnfastructure Core Real Estate Fixed Income Risk Source: Created by case writer from RREEF Research, “Performance Characteristics of Infrastructure Investments,” August 2007, “This documantis authorized for use only in Project Appraisal & Financing by Pot Utkafch Majumdar, NMIMS feom June 2015 to December 2015,-12- UV1067 Exhibit 4 ATHENS RING ROAD (ATTIKI ODOS) Early Stage Infrastructure Assets Potential Sectors + New build toll roads. Risk-Return Characteristics + Pipeline constretion projets Zero tow income yield + New build telecommunications * Moderate to High leverage (39%-75%) network + Expected Total return 18% and above ‘Tnfiastructure investment in an emerging economy Private Equity Earlystage Infrastructure Opportunistic Real Estate Core Real Estate Risk ‘Source: Created by case writer from RREEF Research, “Performance Characteristics of Infrastructure Investments,” ‘August 2007, : “This document is euthoriae for use onlin Project Appraisal & Financing by Prof Utkarsh Majumdar, NMIMS fom June 2018 to December 2018,2901AN “sayUUa ase :201nog 0 xe 0} 0) xe paste] TiysioUNO TVeALE TWOTIDIF WOISSOOUOD BupSMOSIMO TATA ATISTOUMO Tg TSUNO Daa Jonu0s sey SSH roUpo s1e9q ‘spiinq --yuaUL9A08 Yop) sap siwog, Suroueuy ysut sopinosg ——_antioAau sivog jonjuo) pue Buoueury (SOdO DILLLV) GVOU ONT SNIHLV sq Py UY SYA puv soagewapy Bulsinog “E1- “This documents authorized for use only in Project Apprisl & Financing by Prot Ukarsh Majumdar, NIMS from June 2075 to December 2016-14- UV1067 Exhibit 6 ATHENS RING ROAD (ATTIKI ODOS) Estimated Project Costs and Proposed Financial Structure Total Costs Estimated total costs EURI,335 billion Financial structure Equity 33% BUR445 million Debt 67% EUR890 million Detailed Schedule of Cost, Debt, and Equity | (in millions of euros) Year | Project Cost | Equity Investment | Debt Raised Each Year 1996 200 70 130 1997 270 | 90 180 1998 250 60 190 1999 | 250 80 170 | 2000 190 70 120 2001 175 5 100 ‘Source: Case writer estimates.Source: Case writer estimates, 7a UV1067 Exhibit 7 ATHENS RING ROAD (ATTIKI ODOS) Debt-Service Payment Schedule (in euros) Debi payment ba seedule 2002 85 2003 92 2004 100 2005 108 2006 17 2007 120 2008 124 2009 128 2010 1320 | 2011 136 2012 140 | 2013 1440 2014 us| 2015 1533 | 2016 iz 2017 12 | 2018 149ATHENS RING ROAD (ATTIKI ODOS) Proposed Concession Structure -16- Exhibit 8 Debt Providers UV1067, (Banks) | Greek | Government Financing ATTIKI ODOS Attiki Odos JV Operation and ‘mnenodee maintenance Pied contract Design - Build contract Attikes Road access / Diadromes tolls Operations Co. Source: Case writer. Users-17- Exhibit 9 ATHENS RING ROAD (ATTIKI ODOS) Athens Ring Road Major Milestones Advisor to the Greek government is appointed Construction work to begin Construction work to finish Start of operations Transfer of the asset to the Greek government Source: Case writer Jan-1994 Dec-1996 Dec-2002 Jan-2002 Jan-2024 UV1067aos Seoor ses ewe a S06. §°061 - oor - oct ob 8 © 06 ovoet ovr Loe saan 2H Sd VES summa MPG Sab BOD SOTO soy eu ayaa 248 rrwn Wwe Bunjes9do aN woofs 01803, L901A0 (pojou asrauioyto a1dyps 4c!90x9 sound Jo su (SOO IMLLLY) @VOU DNR SNEHLV OL NaN -8I- WI UH) SONafo4g MOLL YSED-19- UV1067 References Colonial First State Global Asset Management, “A Guide To Infrastructure Investments, Infrastructure Research Paper, September 29, 2006. Emst & Young, “Investing in Global Infrastructure 2007: An Emerging Asset Class,” Report, 2007. “Global Project Finance Review.” Second Quarter 2007. Thomson Financial, Guasch, J. Luis. Granting and Renegotiating Infrastructure Concessions: Doing It Right (The International Bank for Reconstruction and Development/The World Bank), 2004, “Manual of Operations 4”, December 2000, Attiki Odos, (in Greek only). “Infrastructure Advisory Facility,” (PPIAF) and PWC. PricewaterhouseCoopers LLP, “Hybrid PPPs: Levering EU Funds and Private Capital,” Report, January 2006. Temel, Judy Wesalo, 2001, Sth ed. The Fundamentals of Municipal Bonds: the Bond Market Association. John Wiley and Sons. “Strong growth in infrastructure sector, Market Update,” June 2007, Credit Suisse