Article by Ron Vered and Brigitta Zibenberg

For many years, project finance has been, and remains, the preferred form of financing for large-scale industrial and infrastructure projects worldwide. The availability of infrastructure facilities is imperative for the overall development and economic growth of any country, especially of emerging economies. Therefore, the long-term need for infrastructure financing in both developing and industrialised countries is very high and of pivotal importance. However, almost every country faces the problem that its actual infrastructure requirements are far in excess of the funding allocated for this purpose. The recognition of this financial deficit has led to a nearly universal acknowledgment that the private sector should play a greater role in the financing of infrastructure in partnership with the public sector.

PPP In Israel

Public-private partnership (PPP) represents a successful policy option available to a government for the provision of basic services (for instance, health, transportation, energy, water desalination, education facilities), which seeks to involve the private sector. As such, PPP is an alternative to traditional full public provision of such services, particularly where the services are private in nature and the government's resources are limited. Thus, for the public sector, PPP provides a level of certainty for schedule and cost. For the private sector it offers a unique business opportunity, allowing private companies to deliver a wide range of services over a long contract period (usually 20 to 30 years).

In recent years, there have been a number of very large projects in Israel in which the private sector has been substantially involved in the construction and funding of public infrastructure. These are long-term and large-scale contractual partnerships between public- and private-sector agencies, targeted towards financing, designing, implementing and operating infrastructure facilities services.

The surge of such project finance transactions in Israel, based on PPP models, coincides with the creation of extensive and long-term government programmes focused on fostering the development of infrastructure in the country. The involvement of private-equity funds in projects such as the construction of toll roads, desalination facilities and other infrastructure facilities is evidence of the maturing PPP market in Israel.

Moreover, witnessing the success of the strategy, the Israeli PPP market is expanding the scope of projects to areas that were previously considered unsuitable. Whereas the traditional perception has been that PPP is suitable mainly for large infrastructure projects initiated by governments, today's perception is that PPP is also appropriate for mid-sized projects (not necessarily in the field of infrastructure and/or initiated by government) such as municipal and non-profit organisations' (NPO) projects. In fact, an NPO that holds real estate is most suitable for entry into PPP projects as it, among other things, possesses suitable land, faces less red tape and regulatory obstacles, and enables leverage of real-estate assets in order to enhance and develop projects.

Regarding the municipal sector, there are a few large Israeli PPP projects that are now at different stages: tenders for sewage-treatment facilities (Jerusalem, Akko and Hadera), Nation Square Complex in Jerusalem (a parking and commercial project), the Municipality Building in Jerusalem and various office complexes, among others. The light rail train projects in Tel Aviv and Jerusalem (which are joint ventures with the government) have many municipal aspects.

In effect, the involvement of the private sector in the development of infrastructure in Israel in the framework of PPP projects appears to be a challenging exercise for a few reasons. First, PPP projects require the establishment of a solid financial and legal basis. Second, the large number of parties involved in the PPP projects, together with the diversity of interrelated contracts, also constitutes an essential complication. Third, their development and embedded negotiations are extremely time-consuming.

In addition, PPP projects are generally structured on a project basis requiring all parties to share the risks of the project. These risks are spread between the various parties; each risk is usually assumed by the party that can most efficiently control or handle it. Project risk-sharing is necessary since the sponsor, a joint venture of one sort or another, will possess a limited worth substantially less than the aggregate net worth of the equity parties.

Finally, PPPs span a range of models which progressively engage the expertise or capital of the private sector. There is no one single PPP model that is suitable for all PPP projects. For this reason, a significant amount of effort and resources must be invested by both public and private sectors in structuring a successful PPP deal.

Innovative Financing Combinations

Banks and institutional investors are the essential participants of almost all PPP projects. Traditionally, the perception has been that banks negotiated the financing and served as lead arrangers, whereas institutional investors acted as co-investors. However, in recent years a new perception has been developed, according to which both of these actors join together in the financing (including the process of negotiations). In such cases, banks negotiate and finance the short-term construction facilities while the institutional investors participate in the long-term credit facilities.

An explicit example of this innovative financing is that of Highway 431, a PFI contract for the construction and maintenance of a 22km, three-lane suburban highway designed for the purpose of reducing the traffic from the main entry routes to Tel Aviv. In this project, banks financed the short-term construction loans and the institutional lenders committed to finance the long-term loans. Highway 431 was awarded the project finance deal of the year for 2006 by Project Finance magazine.

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