1

Athens Ring Road

(Attiki Odos)

28/03/2012




Group 2:

Andr Pinto #430
Dinis Rodrigues # 443
Meul Gulabsinh # 478
Simon Wagner # 465
Tim Otto # 469



Prof.: Jos Neves Adelino
T.A.: Carla Peixoto
T.A.: Andr Fernando


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Executive Summary

The Athens Ring Road Project, a 65 km long highway crossing Athens from west to
northeast, was deemed to be necessary because of increasing congestion, traffic and pollution
in and around the city and was seen critical for Greece to win the bid to host the 2004
Olympic Games.
Main challenges consisted of funding the project and the size and complexity of the project.
Greece, burdened with a high budget deficit, had limited access to funds and the road was
considered technologically advanced, leading to technical and execution risk. Furthermore,
inexperience with such large and complex projects and legal difficulties with affected
municipalities, which needed governmental intermediation, complicated the project.
Deviations from the projections in key drivers of revenue of the project could have significant
implications for the returns of the private and public sector.
The proposed concession structure helps to mitigate some of the risks by allocating these to
the party which seems to be most capable of dealing with it. Using a Special Purpose Vehicle
makes the states creditworthiness less relevant, assuming a public equity contribution of just
25%. At the end of year 2023, the private company returns ownership of the project to the
government. Until then, all of the cash flow generated, which is obtained after subtracting the
operational costs and the debt payment, is paid as dividends to the private sector.
Assuming the base case scenario, attractive returns for the private and public sector with
internal rate of returns (IRR) of 20.76% and 14.80%, respectively, can be achieved. More
leverage in the capital structure would result in increasing returns for the private sector,
whereas an all-equity financed should not be considered due to lower returns for both parties.
Higher cost of debt of 10% leads to outstanding debt at the end of the concession period in
2023, resulting in a lower IRR for the public sector, which is below the highest estimate of the
cost of capital of 8%. The best alternative to overcome this problem consists in extending the
concession contract, until all debt is paid back, resulting in best possible returns for the private
sector, and still making it an appealing investment project.
Main investors in such infrastructure projects can mainly be found within private institutional
investors such as pension funds and insurance companies - besides the pure infrastructure
funds of banks or private equity firms.



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Table of Contents
Problem Statement ......................................................................................................................................... 4
Project Finance and Public Private Partnerships................................................................................ 5
Risks associated with the Athens Ring Road project ......................................................................... 8
Proposed Deal Structure ............................................................................................................................ 10
Financial returns for equity holders ..................................................................................................... 13
Key drivers of Returns ................................................................................................................................ 15
Traffic/day: ................................................................................................................................................ 15
Price and Operational Cost: ................................................................................................................. 15
Leverage: ..................................................................................................................................................... 16
Potential investors ....................................................................................................................................... 16
Alternative scenarios .................................................................................................................................. 17
All equity financed scenario ................................................................................................................ 17
Higher cost of debt scenario ................................................................................................................ 18
Alternatives to higher cost of debt .................................................................................................... 19
Appendix .......................................................................................................................................................... 23




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Problem Statement
The Athens Ring Road project aims to construct a 65km highway, crossing Athens from west
to northeast. Increasing traffic and high pollution in and around the city of Athens were the
main reasons for stronger pursuit of realizing this project. Moreover, the highway was
considered a major step to win the bid for the 2004 Olympic Games to accommodate the
transportation needs of athletes and spectators during the games. This event could have very
positive consequences for the whole Greek economy.
Funding was considered one of the major challenges for this project. The high deficit of the
Greek government made governmental funds almost impossible. Furthermore, the project was
supposed to be very complex given that almost all the construction of the highway,
interchanges, bridges and tunnels would have to be made in the urban setting of Athens,
which involved numerous stakeholders, including 33 municipalities. The highway was even
considered to be technologically advanced, meaning that it was necessary to attract foreign
construction firms, because local Greek construction firms lacked knowledge for such
advanced projects. It was also the first time that such a large and complex project would be
undertaken in Greece.
Yannick Papadopoulos, who was appointed as an adviser to evaluate several alternatives to
source the project by the Greek government in 1994, estimated the cost to be between
EUR1bn and EUR1.5bn, resulting ultimately in an initial cost of EUR1.335bn. The project
was supposed to be constructed within six years. Revenues of the project were solely based on
toll-collection fees based on a regulated price from the Greek government, closely linked to
inflation. Papadopoulos proposed deal structure was a Project-Finance concession with a
financial structure of 67% debt and 33% Equity, structured through a Special Purpose Vehicle
(SPV) called Attiki Odos SA, which would be responsible for the construction, operation and
maintenance of the road.
This report deals mainly with the characteristics of Public-Private Partnership, shows the main
risks of the project and how the concession structure may mitigate these. Furthermore, future
cash flow predictions will be given, analyzing several scenarios with the help of several
sensitivity analyses. To finalize, we will conclude with recommendations to the Greek
government on the best alternatives to undertake this project.



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Project Finance and Public Private Partnerships
The growth of project finance over the last two decades has been driven mainly by the
worldwide process of deregulation of utilities and privatization of public-sector capital
investments. This took place in developed countries as well as in the developing world.
Although a generally accepted definition of project finance does not exist, there are some
main characteristics of this specific way of financing that can be highlighted.
Project finance can be defined as a way of financing the investment in a single-purpose capital
asset with a limited life. This includes as well the creation of a legally independent
organization which is financed with non-recourse or limited non-recourse debt and equity
(from corporate entities called sponsors) in order to manage and execute the project.
This definition points out the major characteristics of project finance. The main feature is the
creation of the legally independent organization, the Special Purpose Vehicle (SPV). The SPV
has a limited life (usually the duration of the project, i.e. 20 to 30 years), it is usually highly
leveraged, owns the projects assets and is the formal borrower under all loan documents so
that in the event of default or bankruptcy, sponsors are not directly responsible. Instead, their
legal claims are against the assets of the SPV (i.e. non-recourse financing). This is the reason
why project finance is often related to off-balance sheet finance, since the assets and liabilities
do not appear in the sponsors balance sheet. This fact shows the great advantage of limiting
the sponsors exposure in case of financial distress.
The second aspect is the nature of the project itself, which are usually long-term
infrastructure, industrial projects and public services. The cash flows generated through the
project are used to cover the operational costs, repay debt and provide dividends to the
shareholders. Furthermore, project finance has a non-recourse or a limited non-recourse
nature of funding. This is due to the fact that the SPV is legally independent from the
sponsors. Non-recourse debt is a type of loan that is secured by collateral which is usually
property. If the borrower defaults, the issuer can seize the collateral, but cannot hold the
borrower liable for any further compensation.
Identifying the project's risks and then analyzing, allocating, and mitigating them are other
important aspects of project finance. This allocation is achieved and codified in the
contractual arrangements between the project company and the other participants. The goal of
this process is to match risks and corresponding returns to the parties most capable of


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successfully managing them. For instance, a fixed-priced construction contract with several
penalties for delays shifts the construction risk to the contractor instead of the SPV or its
lenders. The next chapter will provide a deeper insight of risks and their mitigation in the
specific case of the Athens Ring Road project.
A Public Private Partnership (PPP) is formed when public and private entities (one or more
private entities) decide to collaborate in order to answer to public needs in the most effective
possible way, by sharing resources, risks and benefits. The partnership is called hybrid
(hybrid PPP) if other organizations are involved such as the European Union or the World
Bank. In a PPP project, the public sector entity transfers land, property or facilities controlled
by it to the private sector entity (with or without payment in return) usually for the term of the
arrangement. The private sector entity builds, extends or renovates a facility while the public
sector entity specifies the operating services of the facility. The services are provided by the
private sector entity using the facility for a defined period of time (usually with restrictions on
operations standards and pricing).
These projects may include publicly used motorways, toll roads, power plants,
telecommunications infrastructure, tunnels, school buildings, airport facilities or government
offices. Due to this scheme, the government is able to transfer substantial financial, technical
and operational risk to the private sector. The predefined operational period is determined
primarily by the length of time needed for the facilitys revenue stream to pay off the
companys debt and provide a reasonable rate of return for its effort and risk. At the end of
this period the private company returns ownership of the project to the government.
PPPs can take many different forms, the most usual being BOT (Build Operate Transfer) or
BOO (Build Own Operate) arrangements. In BOO arrangements, the control and the
ownership of the projects remain in private hands. With a BOO project, the private sector
entity finances, builds, owns and operates an infrastructure facility effectively in perpetuity.
BOT arrangements are contracts where the private entity takes primary responsibility for
financing, designing, building and operating the project. Control and formal ownership of the
project is then transferred back to the public sector.
As mentioned before, there are several different categories and types of infrastructure
projects. Though every infrastructure category is different, there are some general features of
this asset class that can be highlighted. Generally, infrastructure investments have a long
duration and steady and inflation linked cash flows, its assets are usually operating as


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monopolies. The high fixed and financing costs cause entrance barriers for other operators if
the nature of the project even allows competition. This means that these projects are often
providing such essential services that they cannot be replicated, which leads as well to certain
price insensitivity (inelastic demand). These combined features result in stable cash flows
which allow the projects to be considerably high levered. At the same time, infrastructure
investments are able to provide inflation hedge. As infrastructure assets are real and tangible,
their replacement costs increase naturally with inflation and thereby protecting their value. On
the other hand, some projects provide cash flows which can be directly linked to inflation
through increasing fees (such as toll roads).
With reference to the risk-return pattern of this asset class, one needs to distinguish between
early stage and mature infrastructure assets. Mature infrastructure assets like established
airports, mature power generation or telecommunication represent established revenues with
total return expectations around 10 to 14% and a moderate risk profile. Early stage
infrastructure assets like pipeline construction projects have an expected total return of 18%
or even higher. Their respective risk profile is higher, having a risk-return characteristic
similar to private equity.
These characteristics of the asset class attract specific private investors. On one hand,
Infrastructure Funds now form a major component of the alternative assets Industry. Between
2006 and 2008, firms like UBS, Carlyle Group or HSBC created more than 100 infrastructure
funds and raised $101 billion. Apart from these specialized funds, infrastructure investments
are attractive to institutional investors such as pension funds and insurance companies as they
can assist with liability driven investments and provide duration hedging. As Infrastructure
assets are expected to produce predictable and stable cash flows over the long term,
improving the diversification of the portfolio and reducing its volatility might be as well
attractive to other institutional investors. Given its low correlation with traditional asset
classes, infrastructure can also play a valuable role in the risk-return optimization of a
portfolio and should be considered in strategic asset allocation decisions.
When talking about potential investors, the evaluation of infrastructure projects has to be
considered. The main difference between corporate finance and project finance is derived
from the multi-purpose organization with several sources of cash flows and the single-purpose
entity with only one source of cash flows respectively. Furthermore, project finance is able to
mitigate agency costs up to a certain extent.


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In project finance, the costs of financial distress tend to be lower. This results from the
negotiation between financiers which lead to a detailed predefined sources and uses of funds.
This and the generally stable cash flows make it as well possible to achieve higher levels of
leverage than those which are usually seen in corporate finance. The higher level of leverage
leads to possible higher returns for shareholders. In addition, risk allocation is carefully
evaluated and negotiated on the basis of the advantages that each party has by being exposed
to these risks. As a consequence, the risks are allocated efficiently at the lowest possible cost.
On the other hand, financial structuring in project finance tends to be very costly due to its
complexity. For this reason it requires a specific scale and is only adequate for large
investment projects. Moreover, due to the instance that these projects are one time, meaning
for a specific purpose, the involved debt and equity have usually a very low liquidity. This
feature should be reflected in the expected return for the investor. This can be seen as some
sort of liquidity risk premium.
Risks associated with the Athens Ring Road project

In a project finance scheme, effective project risk analysis is key to ensure the projects
success. By definition, these projects tend to require an elevated capital commitment and
operational complexity. Ex-ante identification and analysis of all the risk factors affecting the
project will enable a better assessment of the sensitivities of the underlying project and
consequently allows for a more adapted (and effective) risk management avoiding any
mistakes that could compromise the project and increasing the probability of the projects
success.
The first risk inherent to the Athens Ring Road is the complexity and size of the project. The
proposed highway would be 65km long, with 32 interchanges and 197 bridges. Also, it would
have 63 tunnels and flood-protection works and it would require 122.000 square meters for
reserved areas and supporting facilities alone. All of the construction work happens to take
place in the middle of the Greek capital, where expropriating land is additionally difficult.
Further to this technological and construction risk comes the lack of experience in both the
public and private sectors in dealing with such a large and complex project, as it would be the
first of its kind undertaken in Greece (execution and design risk). Moreover, the forecasted
long construction period also increases uncertainty and project risk. Note that these risks
alone can compromise the whole feasibility of the project. Unexpected construction delays
(which tend to be extremely costly in projects of this magnitude) which can arise from


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technical infeasibility of construction or a simple underestimation of costs of any input are a
real threat to the execution and profitability of the project, given that capital expenditures
become highly inflated. This originates the risk about the costs of the project and a possible
budget overrun.
Allied to these execution risks are also some legal risks. The Ring Road would be constructed
in the urban areas of Athens covering 33 municipalities. The bureaucracy involved in dealing
and negotiating with all 33 municipalities is extremely extensive and could delay the start of
the project (in the worst case even prevent the project). At the risk of delaying the
construction process of the project, and consequently increasing the uncertainty surrounding
the final outcome of the initiative, this risk factor should be controlled by the public sector.
Further legal issues are imposed on the public sector in the event of a concession agreement
being reached. It would be the first major PPP deal in Greece. This would add the risk and
concern about the relative absence of specific legislation regarding PPP contracts.
A further main issue surrounding the project is its financing. The highways estimated total
construction and financing cost ranged from EUR 1 billion to EUR 1.5 billion. This is a very
high capital requirement which puts additional pressure on the limited Greek budget on one
side, and huge commitment from the private sector on the other. In terms of the public sector,
Greece already had a high budget deficit (10.2% of GDP) and needed to meet the European
Monetary Union convergence criteria of Government deficit of (or in a descendent trend to)
3% of GDP. Also, the debt to GDP ratio of 60% convergence criteria limited the current and
future Greek Governments financing capability, if a structure that required a huge public
financing was selected. Allied to these limitations was also the cost at which such financing
could be done. The Greek governments credit rating of BBB
1
highlighted the increasing
financing cost and the risk of unavailability of public funding. Hence it is extremely
unrealistic that the government alone could finance such a project. This puts additional
pressure on the private sector as well, as it seemed unrealistic that a private entity could, and
actually would want to, finance and carry the project (and the associated risks) by itself.
Therefore, this issue of governments creditworthiness and a possible default increases the
uncertainty of cash inflow from financing activities guaranteed by the government. On the
other hand, the private sector would only be willing to enter in such an investment if the
conditions and lastly the returns were attractive, which implies certain guarantees from the
government.

1
Granted by Fitch Rating


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This issue is further linked to another sensitive matter that is corporate governance. As in any
principal-agent relationship, there are considerable differences in incentives that drive each
party. Parties involved range between society, municipalities, private sector, banks and the
Greek government. This has the potential to generate considerable conflicts of interest. A
specific incentive and compensation scheme should to be designed to align interests. It must
allow for a thorough monitoring throughout the project as well as describe the control and
obligations of each party. Harmonized corporate governance is essential for the efficient
operation of the project and comprises the most important intangible risks of all.
Another source of risk is whether public demand for the Ring Road would be strong enough.
The single revenue source would be through toll-collection fees. Shortcoming a certain level
of traffic represents a considerable risk on the projects ability to repay its debt obligations
and its ongoing operational cost. At the limit this could even put in question the projects
feasibility. A sensitivity analysis on this topic will be conducted later to evaluate the impact of
this risk in the returns of equity-holders.
Finally, there are also some external issues that could affect the Athens Ring Road project.
Above all the soon-to-be-held Greek elections create the biggest uncertainty: political risk.
While the current government might support the elaboration of the project, it is not clear
whether the next government would as well.
Proposed Deal Structure
The deal structure proposed by Mr. Papadopoulos was a Project-Finance concession with a
financial structure of 67% debt and 33% Equity
2
, structured through an SPV called Attiki
Odos SA. Attiki Odos would be responsible for the construction, operation and maintenance
of the road. The estimated total construction and financing cost of the project was estimated at
EUR 1.335 billion, where debt financing carried an 8% cost of debt. Debt and equity would
be raised step wise, starting in 1996 and continuing for the six years of the estimated
construction period. Exhibit 1 shows the proposed deal structure:



2
There is no information about the division of equity financing among private party and government. We
assumed that 25% would be provided by the government and 75% from private entity. Further explanation will
be given later in the report.


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in m
Project
Cost
Equity
Investment
(%) Equity
Investment
Debt
Raised
(%) Debt
Raised
1996 200,0 70,0 35,00% 130,0 65,00%
1997 270,0 90,0 33,33% 180,0 66,67%
1998 250,0 60,0 24,00% 190,0 76,00%
1999 250,0 80,0 32,00% 170,0 68,00%
2000 190,0 70,0 36,84% 120,0 63,16%
2001 175,0 75,0 42,86% 100,0 57,14%
Exhibit 1 Proposed Deal Structure




In 2002, the year when operations start, generated revenue would first be used to pay
operational and maintenance expenses and then the debt service, according to a pre-
established debt-service schedule. All the remaining profit would be distributed as dividends
to the private shareholders (for a more detailed overview, refer to the chapter: Financial
returns for equity holders).
The single revenue source of the Athens highway will be from toll-collection fees. These fees
are linked to inflation and expected to increase annually according to this rate, imposed by the
government. Attiki Odos SA owns and operates the Athens Ring Road for 22 years. At the
end of this period, the ownership of the Ring Road would be transferred to the Greek
government, which would receive the remaining cash flows as perpetuity. The proposed deal
structure also required that a debt service coverage ratio (DSCR) of 2 be maintained during
the operational life of the project. The concession agreement allows the government to own
the Ring Road and maintain governance, but it also enters into a lease agreement with a
private party that is responsible for operation, maintenance and construction. Therefore, at the
cost of giving up some control of the project to the private sector, most of the projects costs
are allocated to the private sector. Furthermore, as described in exhibit 2 below, the
concession allows allocating most of the risk to the private sector.
Exhibit 2 Sourcing Alternatives and effects in risk, financing and control


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We believe that this deal structure allows for a proper mitigation of the enumerated risks. First
of all, the control of the entity is shared between the two parties, allowing for a more effective
distribution of responsibilities. Design, construction, operation and maintenance are attributed
to the private sector which has a more efficient managerial capability of dealing with these
tasks. While the legal circumstances surrounding the project are attributed to the government
which is a supreme entity and can perfectly mitigate those risks. In other words, each party is
responsible for the tasks where its natural strengths lie.
The financial burden of the Ring Road is also distributed among the public and private sector,
with a higher burden being imposed on the latter. This is a better outcome for the Greek
government, as due to its high budget deficit, and the need to meet the EMU convergence
criteria, made the public financing of the entire project undesirable. At the same time this
capital commitment contributes for an alignment of incentives between the two parties, as the
private sector has the biggest interest in effectively managing the highway. Further
contractual agreements, like the DSCR of 2 during the operational life of the project further
contribute for the alignment of incentives and for the operational feasibility of the project.
Private sector would have the incentive to delay debt repayment in order to increase dividends
received and boost its returns, but The DSCR requirement allows preventing this outcome.
A further plus-point in favor of concessions is that extensive contractual agreements are
required (which in turn can also be seen as a disadvantage as these contracts are very
extensive and complex) in advance that try to allocate responsibilities between all parties
involved. In this way, risks are mitigated in the sense that each party knows what it is
assigned to do. A major handicap of the contract architecture, however, is that it does not
contain incentives for reducing the operating and maintenance expenses. This might lead to
excess spending from the concessionaires side avoiding, this way an early termination of the
concession. Another issue to mention is that the consortium would be made by many medium
sized local firms. Though these firms became in turn quite larger, this might lead to
unavoidable delays of the project bankability, thus project implementation as well.



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Financial returns for equity holders
In order to estimate the financial returns for the private and the public sector, we built the
necessary cash flows from the year 1996 until 2023, when the project will officially be
handed over to the Greek government. The concessions structure proposed by Papadopoulos
consists of 67% debt and the remaining in equity throughout the first five years, adding up to
the total cost of EUR1.335 billion.
There is no specific information about the division of equity between private parties and the
Greek government. A 25% stake from the government seems a reasonable assumption, since
the government needs to have a substantial amount of control over the project, especially to
deal with the 33 local municipalities. Furthermore, from the private investors point of view, it
is not very likely to agree on a concession, where the government takes ownership after the
end of the contract and generates a significant return, without having invested at the beginning
of the project. Additionally, the Greek government is expecting to obtain funding from the
EU, making the whole project a hybrid PPP. Therefore, considering this structure, both
parties, public and private sector, have to provide financing to overcome initial investment in
the first five years from 1996 until 2001.
The projected weighted average price per vehicle of EUR 2.90 and the initial traffic per day of
180,000 cars (supposed to increase by 10,000 cars per year until the maximum amount of
220,000 cars is reached) lead to the revenue of the project. After subtracting the cost of
operations (assumed to be 10% of the revenues), the net operating income can be calculated.
The given debt schedule implies an inflation rate of 3%, in order to fulfill the covenant of the
debt service coverage ratio to be equal to 2. In order to accept the conditions to finance this
project, debt holders demanded this covenant, which means that half of the yearly net income
has to be paid as total debt service until all outstanding debt is fully repaid. The assumption,
that this PPP has the characteristic of tax exemption, leads to the fact that all operating income
is used to repay debt. Furthermore, we assume that depreciation is included in the operational
costs. The remaining amount after paying debt is paid as dividends and can be seen as cash
flow to the private sector, following a simplified Free Cash Flow to Equity (FCFE) approach:
FCFE = Net Operating Income - Debt Service
Moreover, we assume that during the first 22 operational years of the ring road, all the
dividend payments revert solely to the private entities.


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0
500
1.000
1.500
2.000
2.500
3.000
6,0% 6,5% 7,0% 7,5% 8,0%
In the base case scenario, assuming a cost of debt of 8%, the debt is paid back within the year
of 2018, meaning that from that point forward, all net operating income is considered as cash
flow to the private investors. By setting the Net Present Value of all cash flows for private
investors to zero, we can estimate the discount rate to reach this scenario, which equals the
internal rate of return (IRR) of the project. This leads to an IRR for the private sector of
20.76%. The calculations for the cash flow can be seen in greater detail in Appendix 1.
The public sectors IRR is calculated with the help of the terminal value of the project in
2023. Assuming a cost of capital of 8%, which represents the worst case scenario within the
range of 6-8%, and a growth rate which is equal to the inflation rate of 3%, we can calculate a
terminal value. In the base case scenario, the terminal value is EUR 1,005.76, leading to an
IRR of 14.80%. The IRR from the public sector just takes into account the initial investment
and the terminal value, because all cash flows during the contract period are paid to the
private sector. A lower cost of capital leads to a strong increase in the terminal value and has
therefore favorable implications on the public sectors IRR, as demonstrated in the two
exhibits below:
Exhibit 3 Table: Terminal value of project with different costs of equity


Exhibit 4 Chart: Terminal value of project with different costs of Capital









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Key drivers of Returns
The internal rate of return for equity holders is very sensitive to some criteria that lead to the
final cash flows and consequently to their return. In order to check the robustness of the
calculation, a sensitivity analysis of the key drivers will show the impact of changes in the
variables. To make this analysis viable, we assume a flexible debt service schedule, so that the
main covenant of the debt holders, that DSCR is equal to 2, can be maintained in every year.
This may lead to longer debt repayment duration in some scenarios or even outstanding debt
after 2023, which will have a negative impact on the IRR of the public sector. Nevertheless,
this assumption seems more reasonable than violating the covenant in scenarios, which have
less favorable components than the case base scenario.
Traffic/day:
Traffic is an important variable especially for the internal return of the private sector. The
amount itself as well as the average increase per year directly affects the revenue and
therefore the cash flow received by private investors. If traffic is not as high as projected, they
will gain lower returns. Public returns are not affected, because the terminal value does not
change in the different scenarios. Due to the fact, that the maximum amount of 220.000 cars
per day is reached in every scenario in the last year of the concession contract, the cash flow
in this year stays constant. The corresponding sensitivity analysis can be seen in appendix 2.
Price and Operational Cost:
The average price and the operational cost are other variables that determine the revenue and
have therefore an immediate impact on the IRR of private investors. Prices are supposed to
increase with the inflation rate, which can be seen as the key driver for this variable.
Appendix 3 shows the sensitivity analysis with these two variables. Even a 1% change in the
inflation rate has significant impact on the internal return. Combining a scenario with an
inflation rate of 2% and cost of operations of 15% of revenues results in an internal return of
18,87%, considerably lower than the 20,70% from the base scenario. A constant low inflation
rate of 1% combined with operational costs higher than 10% result in an incapacity of
repaying debt until the end of the concession contract in 2023 (shaded grey in appendix 3).
However, a long term deviation from the proposed inflation rate of 3% is unlikely to happen


16
because of Greek government and EU implementation, who try to fulfill their long-term
targets
3
.
Leverage:
The proposed structure by Papadopoulos suggests a capital structure of 67% debt and 33%
equity. Small changes in this structure result in differing IRRs for the private and the public
sector. The higher the amount of debt is, the more impact has the leverage effect, resulting in
substantially higher internal returns for the private sector, as a lower up front capital is
required. But with an equity stake of 15%, the debt will not be able to be repaid until 2023,
resulting in a substantial reduction in the IRR for the public sector as we assume that all the
remaining debt outstanding would be repaid by the government
4
- which is even lower than its
cost of capital. In general, the IRR for the public sector is less sensitive to changes in the
capital structure, because the terminal value is in most scenarios constant. An overview of
several different structure propositions can be found in appendix 4.
Potential investors
A fund manager chooses where to invest according to its funds goals and policy. This project
is extremely attractive from the return point of view (assuming the conditions that led to the
previously mentioned IRR above 20%). However it is extremely illiquid which means a high
opportunity cost for funds that pursue a short-term strategy. The previously mentioned risks
also limit the investment from short-term focused funds with a safer approach.
The project has several conditions that appeal more long-term motivated funds, especially
those with high duration liabilities that seek to match them with high duration assets like this
one. These funds often are very exposed to equities, and infrastructure assets are known for
their low correlation with equities. Therefore this asset class contributes to diversification and
reduces the funds risk. Moreover the prospect of stable cash flows that grow with inflation is
attractive and is reinforced in a project like this which is highly regulated and does not have
lots of alternatives. Also, the fact that the concession will be returned to the government in the
future provides incentives for the government to be interested in the success of the project, by,
for example, not providing substitute services. In order to invest directly in this asset a fund

3
Long run inflation rate in Greece is likely to converge to 3%. However, we have to highlight that the ECB has a
target inflation rate of 2%.
4
In this case the project will not be completely non-recourse. The Government will assume all liabilities if the
debt is not repaid until the end of the SPV.


17
would have to be extremely large therefore only a few could enter in this investment:
examples are pension and endowment funds. A recent trend in the market is the creation of
funds specialized in infra-structure projects; several of these could invest in this project. This
would allow individuals and institutional investors, as well as funds of funds, to invest in
these infrastructure funds and thus indirectly own a position in the project.
Alternative scenarios
All equity financed scenario
If the Athens Ring Road project was to be all equity financed, maintaining the same structure
of equity (25% Greek government and 75% private sector
5
), it would yield an IRR of 11.70%
and 15.24% for the public and private sector, respectively.
Exhibit 5 IRR of base case scenario and all equity financed project
IRR Base Case All equity
Private 20,76% 15,24%
Public 14,80% 11,70%

The main reason for the drop in return is due to the loss of the leverage effect. Financing this
project partially with debt, allows a lower equity capital commitment in the beginning, so the
profits (or losses) are shared among a smaller base and are proportionately larger as a result.
Comparing it to the base case scenario which assumed a 67% debt to capital ratio, financing
the project entirely with equity is clearly less attractive to both the government and the public
sector. In fact, according to recent research on Performance Characteristics of Infrastructure
Investments, for the level of risk, early-stage infrastructure has an expected total return of
18% and above
6
. This would probably mean that private investors would be unwilling to
commit this level of equity for such a low return. This would turn out to be an unattractive
project, and would raise some additional risks into whether the project would generate enough
interest by institutions and individual investors, since it is likely that they would be able to
earn a better return, for the same level of risk, elsewhere.


5
This ratio is applied in the first six years for the equity requirements of the public and private sector
6
RREEF Research, Performance Characteristics of Infrastructure Investments August 2007


18
Higher cost of debt scenario
Assuming the base case scenario (project financed with a debt to capital ratio of 67%), if the
cost of debt financing was higher at 10% (up from 8%), the interest expense and consequently
the cumulative debt and interest would increase. The effect of these additional costs would not
have a significant impact in the returns for the private sector, since IRR would only decrease
to 20.15%.
On the other hand, there would still be debt outstanding of EUR 484 million by the end of the
concession period. Since it is assumed that the ownership of the project would be transferred
to the government in 2024, this means the state would have to bear the remaining debt costs.
If we deduct these outstanding costs to the perpetuity (stream of cash flows for the
government), the government would have an IRR of only 7.70%. If we assume a cost of
capital for the government of 8%, this would mean the project would yield a negative Net
Present Value. Below we can see more clearly the effect of different costs of debt financing to
the returns of both the private and public sector. It is important to mention that in these
computations we have changed the debt repayment schedule in order to meet a debt service
coverage ratio of 2.0 which is required by debt providers.
Exhibit 6 Table: IRR of base case scenario with changing cost of debt
Cost of Debt (DSCR = 2)
IRR 6% 7% 8% 9% 10% 11% 12%
Private 21,36% 21,04% 20,76% 20,41% 20,15% 20,15% 20,15%
Public 14,83% 14,83% 14,83% 14,83% 7,70% 5,53% 4,65%

Exhibit 7 Chart: IRR of base case scenario with changing cost of debt

It is interesting to notice that the IRR for the private sector is quite insensitive to different
costs of debt. In fact, between 6% and 12% of cost of debt, the IRR for private investors only
0%
5%
10%
15%
20%
25%
6% 7% 8% 9% 10% 11% 12%
Private
Public


19
changes a little over than one percentage point. This is clearly not the case for the Greek
government: whenever there is outstanding debt by the end of the concession period, the state
has to assume this cost and this affects its rate of return. This happens for a cost of debt of
10% and higher, and for these cases the IRR is below the cost of capital of 8% for the
government (marked in green line in the chart). If this was a conventional project decision
taken within a firm, it would likely be rejected since the basic NPV rule is to reject projects
which return a negative NPV, which means the project would actually be destroying value,
rather than creating value. However, since this is a project carried by the government, we
should take into account that there are other objectives involved other than monetary, such as
increasing society well-being and reducing traffic and pollution, which could also impact the
decision-making process.

Alternatives to higher cost of debt
As we have seen earlier, if the cost of debt was 10% in the base case scenario, the government
would be the most affected between the equity holders, making a monetary loss in this
investment. In order to avoid such situation to happen, we could propose the Greek
government to consider three distinct options that could mitigate this risk.
The first option would be to extend the concession period, so that the debt repayment is
entirely covered by the private sector during this period. In this scenario, the concession
would have to be extended to three more years, until 2026. By doing this, the IRR for the
private sector would be relatively unchanged at 20.32%, yet the IRR for the public sector
would be much healthier than before at 12.33%, earning at least the cost of capital. In this
way, even if the project has higher financing costs, it can still be appealing for both private
investors and the government (See appendix 5 for full computations).
Our second proposal would be to change the capital structure of the project, by borrowing less
and committing a higher percentage of equity. If we assume a debt to capital ratio of 50%
(equal debt and equity commitment) and maintain our initial equity split of 25/75 between the
government and the private investors, all debt is cleared by 2013 5 years before the base
case scenario. The returns in this proposal would be IRRs of 17.24% and 13.16% for the
private and public sector, respectively. Again, in this case the government earns the cost of
capital; however, we are aware that this might be an unlikely course of action, due to the
Greek governments high budget deficit as a % of GDP and the pressures to meet the EMU
convergence criteria. This is also a hindrance for the private sector, as there are not that many


20
private entities able to undergo such a large investment. Also the return might not be
sufficient to convince private investors to commit with such a large equity portion. The lower
rates of return are generated by the decrease of the leverage effect, and the higher initial
equity commitment (See appendix 6 for full computations).
Finally, our third suggestion would be to renegotiate the debt service coverage ratio with the
debt providers, in order to pay back the debt more quickly. Assuming a scenario where
sponsors could bring the DSCR down to 1.5, debt would be fully repaid by the end of 2016.
The government could maintain its initial rate of return unchanged at 14.8%, since it would
commit the same level of initial equity and earn the same perpetuity of cash flows. On the
other hand, a lower DSCR would mean more cash flow allocated to debt holders than equity
holders in the first years of the concession, until debt is repaid in full. Taking into account the
concept of time value of money, higher cash flow streams in later years do not necessarily
mean a higher return. In fact, the IRR for private investors would decrease to 17.58% as a
result of a lower rate of dividends in the first years. This scenario makes the project less
attractive to private investors, although still very close to the above mentioned hurdle rate of
18% for early-stage infrastructure investments. Alternatively, a higher cost of debt financing
would not affect the returns of the Greek government (See appendix 7 for full computations).
Below we present a summary of the returns under the three options mentioned above.
Exhibit 8 IRRs of each alternative

Internal Rate of Return
Scenarios Public Sector Private Sector
Base Case Scenario 14,80% 20,76%
Extend the Concession Period 12,33% 20,32%
Decrease debt to capital ratio to 50% 13,16% 17,24%
Renegotiate the DSCR to 1.5 14,80% 17,58%

While in a conventional project within a firm, the decision is usually to take the highest IRR
option whenever possible, the approach here is a little different. There is a trade-off between
the returns of both equity holders, and the government should take into account that
whichever option they chose, they still have to pitch the project to private investors. For that
reason they need to package it in way to make it both an attractive investment for the
private sector and ensure the maximum return to the state.



21
Conclusion and Recommendation
The execution of the Athens Ring Road project would definitely lead to an increase of social
welfare. The establishment of the ring road is seen as crucial for Greeces bid to host the 2004
Olympic Games which would obviously lead to further economic growth in the country.
The proposed concession structure through a PPP can thereby mitigate some of the major
risks. Though not all of the risks that may arise in this project can be mitigated, the design,
construction and operational risk will be mostly shifted to the concessionaire (private sector)
while the government (public sector) will handle the legal issues with the municipalities.
Furthermore, the state could reduce the financial risk which emerges from the high investment
costs and the government deficit as it will only contribute a low equity stake in SPV (in our
assumptions 25%).
The proposed capital structure of 33% equity and 67% debt for the project will lead to
attractive returns to both the private and public sector. Based on the projected cash flow
stream, the assumed cost of debt of 8% and the covenants, the private and the public sector
can expect an IRR from this project of 20.76% and 14.80%, respectively. In the perspective of
private investors this projects expected returns are consistent with what is usually expected
from early stage infrastructure assets. In the governments perspective this has, besides the
non-monetary benefits, a return significantly higher than the cost of capital.
The sensitivity analysis on the capital structure indicates what already was expected. This
means, the higher the leverage ratio, the higher the returns to the private sector. If the project
would be all equity financed, the IRR would drop for the private sector to 15.24% and for the
public sector to 11.70% respectively. Comparing it to the base case scenario which assumed a
67% debt to capital ratio, financing the project entirely with equity is clearly less attractive to
both parties.
When holding the capital structure constant and changing the cost of debt to 10% (keeping the
DSCR constant), our analysis indicates a slight decrease in the IRR for the private sector but a
considerable decrease for the public sector. In order to avoid this scenario we recommend
three different options. First, the government could extent the concession period. The second
possibility would be to decrease the debt to capital ratio to 50% so that the project would still
be profitable for the government. The last proposal would be to try to renegotiate the DSCR to
1.5 in order to maintain the governments initial return of 14.8%. By choosing the best of


22
these options, one has to consider that it has to be as well appealing for the private sector. We
would recommend the extension of the concession period as it yields the highest IRR for the
private entity, 20.32%.
We have discussed alternatives that consisted in changing the DSCR, leverage and concession
period. While doing that, for simplicity purposes, we assumed that it would not change the
cost of debt but, in reality, these changes would likely impact the cost of debt; for instance,
just by decreasing leverage the cost of debt would decrease significantly.
To conclude, the main investors in such infrastructure projects are expected to be - besides the
pure infrastructure funds of banks or private equity firms - institutional investors such as
pension funds and insurance companies which are liability driven and usually seek for high-
duration and strong cash flow stream investments.

23

Appendix
Appendix 1: Cash Flow computations for base case scenario

24

Appendix 2: Private Sector Sensitivity Analysis (Traffic per Day and Increase per Year)

Traffic per year (DSCR = 2)

IRR 160.000 170.000 180.000 190.000 200.000
I
n
c
r
e
a
s
e

p
e
r

y
e
a
r

2.500 18,03% 18,86% 19,63% 20,31% 20,90%
5.000 19,04% 19,67% 20,24% 20,73% 21,13%
7.500 19,57% 20,07% 20,52% 20,92% 21,22%
10.000 19,89% 20,32% 20,70% 21,04% 21,28%
12.500 20,11% 20,48% 20,81% 21,08% 21,30%
15.000 20,27% 20,59% 20,88% 21,14% 21,32%
17.500 20,37% 20,68% 20,94% 21,16% 21,34%
20.000 20,48% 20,74% 21,00% 21,18% 21,37%

Appendix 3: Private Sector Sensitivity Analysis (Inflation Rate and Operational Cost)
Inflation rate (DSCR = 2)
IRR 1,0% 2,0% 3,0% 4,0% 5,0% 6,0%
O
p
e
r
a
t
i
n
g

C
o
s
t
s

5,0% 19,70% 20,62% 21,55% 22,47% 23,38% 24,28%
7,5% 19,27% 20,20% 21,13% 22,05% 22,97% 23,88%
10,0% 18,83% 19,76% 20,70% 21,63% 22,55% 23,47%
12,5% 18,45% 19,32% 20,26% 21,20% 22,13% 23,05%
15,0% 18,08% 18,87% 19,82% 20,76% 21,69% 22,62%
17,5% 17,71% 18,40% 19,36% 20,31% 21,25% 22,19%
20,0% 17,33% 18,01% 18,89% 19,85% 20,80% 21,74%

Appendix 4: Sensitivity Analysis (Capital Structure)

Capital Structure (DSCR = 2)

IRR Private Public
E
q
u
i
t
y

S
t
a
k
e

15,0% 30,82% 7,98%
20,0% 26,26% 13,00%
25,0% 23,02% 15,29%
30,0% 20,56% 14,72%
35,0% 18,62% 14,24%
40,0% 17,03% 13,83%
45,0% 15,70% 13,48%
25

Appendix 5: Cash Flow computations for longer concession period with cost of debt of 10%



26
Appendix 6: Cash Flow computations for debt to capital ratio of 50% with cost of debt of 10%



27
Appendix 7: Cash Flow computations for DSCR of 1.5 with cost of debt of 10%