MSc Infrastructure Engineering and Management

ENGM263 Infrastructure Financing

Coursework 2018-2019

Due date: 3rd December 2018

INFRASTRUCTURE PROJECT FINANCE

SYLVANIA

N
BLACK SEA
Skil
Black Mountains
Mountains

Red River
BROMA Airport
il
Newport
Westville

Korsov
Blue Nat. Park
River

Blue St. Paul

Lake

50 km

1
 Broma Airport

Introduction:

 Sylvania is a thriving Central European economy with a population of 11

million. The capital, Broma, is situated on the banks of the Red River,
60km inland from Newport.

 Over the last 5 years the economy has been growing at 5% p.a., with
major contributions from “Silicon Valley-type” developments centred on
the university at Westville and the exploitation of iron ore deposits found
in The Black Mountains.

 As a result of the economic boom in recent years. Broma has expanded

as a governmental/business centre, and Newport, the country’s main
gateway to The Black Sea, has become a significant export/import
terminal.

 Apart from a growing economy, Sylvania has miles of sandy beaches

along the Black Sea coast, together with sites of special environmental
and scientific interest, viz. the Korsov National Park, 20 km south of
Newport. Over the next 10 years, the Government hopes to develop the
tourism potential of the area with a program of hotel and marina
construction.

 Hence, there is a need to ensure efficient international transport links

between Sylvania and the Rest of the World, particularly Western Europe.

 Currently, Sylvania has one major commercial airport, located on an old

military airfield, halfway between Broma and Newport, [see map].

The Project: New Broma Airport:

 The existing Broma airport facility was built as a military installation in the
1950’s. It has a single, long runway, adequate for today’s volume of traffic
and the commercial aircraft in operation. The airport is located in open
country 5km north of the Broma – Newport motorway. There is a two-lane
road link connecting the airport to the motorway, but it will need upgrading
if and when a new Broma Airport is developed. There is currently no
connection or station with the Broma – Newport railway line, which runs
between the existing airport and the motorway.

 The existing passenger terminal is a converted military building and is

now 45 years old. There are, however, three large hangers left over from
the military operations at the airfield, which could form the basis for a
warehousing and freight management facility, at least for the foreseeable
future.

 The land at the airport is owned by the Ministry of Defence, who are
prepared to cede the freehold to the Min. of Transport. There is plenty of
space for a new terminal, plus other facilities, e.g. car parking, etc..
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 The normal prevailing wind at the site is west-to-east, with incoming
flights approaching the airport from the Black Sea, overflying the suburbs
of Newport, 20km away. The nearest residential population is a small
village 5 km to the south-west of the site.

 In 2017-18, the airports division of the Min. of Transport commissioned

some initial studies for a new airport, based on:-

o A new passenger terminal;

o A new freight terminal;
o Re-surfacing and upgrading the runway and aprons;
o New Navaid equipment to meet international standards;
o Upgrade of the access road from the Broma – Newport motorway;
and
o Car parking facilities; bus stands; etc..

 Capital Costs:

The total Capital Cost estimate (2018 prices) = €195 million, made up
from:-

o €75mn for upgrade of runway and aprons; Navaid; access road

and car parks., and
o €120mn for a new passenger terminal and freight management
facility.

 Construction period = 3 years; spread evenly over the period.

 Topography: flat with no significant hills or valleys.

 Traffic & Revenues:

o The Airport’s revenues are made up from:

 a tariff paid per departing passenger for passenger handling;

 a tariff paid by each aircraft landing/departure (“ATM” = air
traffic movement), covering ground services, Navaid costs, etc.;
 revenues from freight handling;
 revenues from commercial services, e.g. leases of restaurants,
shops, etc., at the Terminal**

[** = proposals have already been discussed with a major Sylvanian

property developer to build a hotel and conference/exhibition centre at
the Airport, but no firm contracts have been signed].

o The consultant estimated the traffic as below:-

 Departing passenger numbers per day = 3,000

 Tariff per departing passenger = €15.00
 Growth of passenger numbers from start of operation = 2% p.a.
 ATM (passenger & freight) per day = 15 aircraft
 Tariff per aircraft ATM = €10,000.00

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  Freight & commercial revenues combined = est. @ 25% of
passenger tariff revenues
 Annual days of operations = 360 days per annum.

o Being the only major airport in Sylvania, the airport will operate, in
effect, as a monopoly service for Sylvania. Further, given that the
current airport is run-down and inefficient, traffic forecasts and
revenue projections are somewhat speculative and open to significant
adjustment.

o Once built, traffic volumes are expected to increase in line with

general inflation.

 Operating Costs:

o Estimated operating costs include:-

 Labour and utilities = 50% of revenues per annum [NB. 40% for the
terminals only option]
 Administration & fixed costs = 15% of revenues per annum
 Maintenance = 7% of capital costs per annum.

 Economics and Finance:

 The Government have an open mind as to whether the new airport should
be privately-owned and operated as a long-term PPP-type concession, or
wholly, state-controlled, or a hybrid of the two (e.g. the passenger and
freight terminal owned and operated by the private sector, but the civil
construction, runways, aprons, etc. built and paid for by the State. An
alternative could be create a PPP concession with the concessionaire
paid via Availability payments.

 On the other hand, the Min. of Finance prefers, if at all possible and due
to overall national budgetary constraints, to have the funding and financial
liabilities for the project “off balance sheet”.

 The Government has passed a law in 2014, which allows the private
sector to provide public services as long-term (e.g. 30 year) concessions,
e.g. PPP.

 The national currency is “the Blot”, and it is linked to the Euro. However,
although a significant proportion of the project capital and operational
costs will be paid for in Blot, revenues will be paid in Euros (€).
The exchange rate between the Euro and the Blot has been stable over
recent years (in spite of its nomenclature, which dates back to the 16th
century), and the Government has plans to join the Euro in the coming
years. Government financial policies have been seen as prudent with this
objective in mind.

 The country has a short-term BBB - “rating”, which is typical of a growing

and emerging developing country. The Government has recently raised a
12 year Eurobond at 5% and there are plans for the City of Broma to
issue a 5 year bond in 2020. However, the Government overspent on
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 public service investments in 2016/17, and there is growing concern
among international financiers as to the long-term strength of the
economy. Corporate defaults are rising.

 There are to be National Elections for a new President and Parliament in

18 months’ time. The Government would like to PPP concession contract
to be awarded by the time of the Elections, if that is the best option for the
project. It is hoped that construction of the new airport can start in 2019

 Local environmental groups, particularly around Newport, have expressed

concern with respect to the environmental and noise issues associated
with the development.

 IFC (World Bank), the EIB (EU) and The Black Sea Development Bank
have indicated that they might be prepared to lend to the Government for
up to 20 years’ repayment at 4% p.a. interest for this project, which they
see as important for the country’s development. However, the Min. of
Finance hope to limit their exposure to / financial liability for, the project.

 An alternative structure suggested is to fund the combined passenger and

freight terminals separately from the runway and apron works, as a PPP-
type concession, and local commercial banks have made an indication
that they might lend in € for up to 15 yr repayment period at 4% interest
p.a. for such a concession for the terminal(s). The balance of
runway/apron costs would then be funded out of Government resources.

 Local construction inflation in 2016/17 was 5%, but the general inflation
rate was 3% p.a.

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Tasks:

Evaluate the alternatives and prepare a business review with a

recommendation to the Government as to how to proceed. You might like to
address the following issues:-

 What are the key project risks facing the project?

 How might such risks be controlled or mitigated?

 How might the project be best structured and funded? What are the
options? How much debt? How much equity?

 Are the project cash-flow projections attractive to investors and lenders,

whichever project structure is adopted? [prepare a simple cash-flow
model for both options, i.e. fully Government-funded case, or private
concession for terminals alone, leaving Government to fund the runway,
etc. out of its own resources.] Is a PPP-type concession for the terminal
financially viable?

 If financially unattractive, are there any alternative corporate and financial

structures, which could be used to improve the possibility for private
sector involvement? What impact might such alternatives have on
Government?

 Are there any other costs associated with the development, which need to
be taken into account? If so, what and how much?

 Which option(s) would you recommend to the Government if you were

their advisor?............. or would you recommend an alternative?

 What additional information might you need for such projects to receive
final approval?

Assessment criteria:

 Your report is expected to be no more than 12 pages (single-spaced) and

should include a separate cash-flow(s) with a description of your
assumptions.

 Marking outline

Risk identification = 25%

Risk mitigation = 20%
Financial structure and sources of finance = 15%
Cash-flow model with review of results = 25%
Understanding of the project and discussion of options = 10%
Recommendation & presentation = 5%