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24 Int'l Fin. L. Rev. 113 (2005)
Public-Private Projects: The New Frontier

handle is hein.journals/intfinr24 and id is 217 raw text is: Public-private projects: the new frontier Israel is pioneering public-private project financing in the Middle East. Yehuda Raveh and Calev Myers of Yehuda Raveh & Co assess the Cross- Israel Highway Project, one of the country's first projects of this kind udgetary cuts and deficits at gov- ernment and municipal levels throughout Europe, as well as the need to improve infrastructural systems to boost economic growth and prosperity have led governing bodies in central and eastern Europe to seek ways to privately fund public projects. Today, PPP/BOT (public-private partnerships/build, oper- ate, transfer) transactions account for most of these initiatives. Private lenders joining these transactions are typically made up of syndicates of local banks and institutional lenders such as pension funds, providence funds, and insurance companies, as these projects best serve their interest in long-term secured invest- ments that generate higher returns than other conservative secured loans. Infrastructure projects have tradition- ally been used to kick-start slow economies. With many economies still in recession, construction costs are low, so it is an ideal time for infrastructure development to occur. The transaction structure embodied in PPP/BOT trans- actions is the most rapidly expanding method of carrying out national infra- structure projects in much of Europe and its surrounding regions. Over the last seven years, an impres- sive number of the region's most vital assets have been planned, constructed and financed through PPP/BOT trans- actions, and Israel appears to be a pioneer in this field. From toll roads that span the nation and city-wide light- rail systems, to national water desalination plants, electric power plants and natural gas lines, more and more of Israel's public infrastructure is being financed in whole or part by the private sector. Since the late 1990s the Israeli government has successfully tendered: a $1.35 billion cross-nation toll road - among the three most sophisticated toll roads in the world; a $400 million light rail transit system in Israel; a $250 mil- lion sea water desalination facility; and a $100 million power station. Municipalities and local governments have followed suit. Jerusaleas munici- pality square was a $120 million project funded through PPP financing. In the pipeline are typical PPP/BOT transac- tions, such as the construction, operation and maintenance of additional toll roads, schools, prisons and hospitals as well as heavy rail, light rail, roads, natural gas lines, airport development projects, and several additional desalina- tion facilities, which total in aggregate about $7 billion. Although the PPP/BOT project finance is a new concept in eastern Europe, this transaction structure is developing at an amazing rate. It is esti- mated to reach a total of $100 billion over the next 10 years. The typical PPP/BOT structure entails setting up a special purpose company (SPC) to enter into a con- * cession contract with a public enti- ty, whereby the SPC is usually restricted from entering into any additional busi- nesses or [ a at.i obligations. Over the last several years, governments in Europe and the surrounding regions have been developing standard forms of concession contracts, resulting in less negotiation and a shorter time frame being needed to achieve financial close. Government officials are also becoming more comfortable with the private sector taking responsibility for sectors that until recently had been the exclusive domain of the public sector, as they enjoy the benefits of high-quality infra- structure development without draining their already cash-deficient economies. Typically, the public entity, whether national government, municipality or other statutory body, expects the private sector to assume the design risks, risks concerning quantities and schedule, and cost overruns during both the construc- tion period and the operation and maintenance phase of the project. The transactions are normally based on a limited recourse basis, but the public entity typically seeks direct guarantees from rhe sponsors of the SPC for the investment of equity and subordinated debt as well as requiring that it be a third party beneficiary under the various material project documents. The public entity usually assumes the following risks: the demand shortfall risks; archae- ological findings disrupting schedules; and consequences of war, terrorism and similar security threats. In some countries around the world, specific statutes have been enacted to regulate PPP/BOT transactions, the largest of which is China, which is working hard to prepare infrastructure for the 2008 Olympic Games. The Cross-Israel Highway Project The Cross-Israel Highway Project, a milestone project for project finance in Israel, was based on the PPP/BOT model and closed in October 1999. The Cross-Israel n y Highway Project consists of an - 86km toll road a have and has up to four lanes in each San direction, 13 h interchanges, 80 bridge structures, 100km of agricul- tural roads and a 400-meter tunnel. The highway is a toll road using sophisticated electronic tolling technology that allows highway users to travel freely and uninterrupted by toll collection points. This tolling sys- tem had already been operating successfully for several years on Highway 407 in Canada. The Cross-Israel Highway is the first toll road in Israel and has been designed and constructed to the best international standards and incorporates state of the art technology as well as groundbreaking and innovative design and construction techniques. www.itlr.com IFLR/March 2005 113 FLR/March 2005 113 www.iflr.com

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