N33 Highway, The Netherlands


 

The Netherlands – known to be an active and advanced PPP market – has also been lauded in PPP circles for sticking to tough procurement timelines for projects while making sure financing is smooth and timely. While some may argue that the N33 road project is not a massive road scheme or a large transport project by any standard, its landmark financing method is definitely one that has left an indelible mark on infrastructure financing overall. The project saw a pension fund serve as a debt provider for the first time in the Dutch market. It was also the first time that index-linked financing was provided to an infrastructure project in the Dutch market.

N33 - Project Background

The N33, essentially a highway widening scheme - will see the N33 road in the Netherlands widened to a dual carriageway between the towns of Assen and Zuidbroek. It will cover a distance of 38km, and a new node, either a double roundabout or a cloverleaf junction, built at Zuidbroek. The availability-based DBFM project has a concession length of 20 years plus three years construction from the award date. It is intended to make overtaking less dangerous on the busy road, where the accident rate concerns the transport ministry.

A BAM/PGGM joint venture was named preferred bidder for the project on 30 August 2012 and will be carrying out the road widening work for the next few years. Together the sponsors contributed around 10 per cent of equity into the project. The N33 is understood to be the second Dutch infrastructure investment for PGGM.

Work on the road project will start in 2013, and the project is expected to be completed in the spring of 2015.

Image courtesy: Google Maps

Financing

Pension fund APG and commercial banks BTMU (documentation and insurance), Germany’s KfW (Technical due-diligence) and Dutch bank Rabobank (Agency and account banking) came together to close the deal.

The three banks will be picking up equal tickets on the short-term construction phase debt which is €120 million. The tenor for the construction phase debt is approximately three years. Banks are also providing an equity bridge loan as well as a small project loan. Debt to equity ratio stands at 90:10.

The three banks are providing 100 per cent of the debt during the construction phase which will be followed by a post-construction phase refinancing facility. Pension fund APG will be providing 70 per cent of the refinancing debt, around €80 million, while the rest of the 30 per cent will be held by the three commercial banks. The tenor for the refinancing phase debt is 20 years. APG will be providing debt at a fixed rate and even though it enters the project at a later stage. APG will receive an inflation-proof fee for the loan capital it will be providing during the post construction phase.Financing diagram

The Dutch government was very keen on this financing model in order to make financing the project cheaper. While some private sector sources close to the project told IJ News earlier this year that they thought pricing would not be the only consideration – they thought that the pension fund option would likely work out cheaper.

Index-linked financing is the real key to the success of this project. The pension fund element of the deal is cemented in the Dutch government’s commitment to provide index-linked revenue from the project, which in turn allows APG to provide fixed rate, index-linked financing, and ultimately a cheaper source of capital.

The inflation linked loan real coupon is the combination of the real base rate plus the margin (just as a bank funding coupon is effectively the swap rate plus margin). The inflation linked investor sees its lower coupon income compensated by the inflation accrual on the loan outstanding balance. In other words, the real investors return is determined by a (lower than traditional funding) coupon return and the accrual of the actual inflation on the outstanding principal balance of the loan.

For the SPV, a matching of its income from the unitary charge/concession fee and the loan payments (whether that's inflation linked or fixed rate funding) results in no swaps required to match income and funding liabilities, thereby lowering the total funding costs of the SPV.

The total cost for the widening of the N33 road, apart from the road-building costs, also includes the costs for the purchase of land, nature compensation, surveys, and building costs that fall outside the scope of the DBFM contract, according to a BAM PPP statement. Around half of the necessary project budget will be provided by the provinces of Groningen and Drenthe, and the Assen, Aa en Hunze, Veendam and Menterwolde municipalities.

Looking Ahead

The infrastructure industry is hopeful that sponsors and governments alike will come out in full force to involve pension funds in infrastructure projects.

At the moment though, while the Netherlands has further road deals in the pipeline, the one expected to reach financial close next will not be utilising the pension debt model. The estimated €1 billion plus A1/A6 highway widening PPP in the Netherlands which is expected to reach financial close at the end of the first quarter of 2013 will be financed with a combination of bank debt and equity.

However there is hope that perhaps the ViA15 toll road, the A9 or the Limmel Lock projects will use pension fund financing in the Netherlands in the near future. And if not the Netherlands, let's hope the UK -  which has committed to bringing in pension funds more actively into infrastructure financing - will take a leaf out of the Dutch project finance book for the future.

At the moment though, along with issues of size and scale amongst the UK pension fund industry, problems have also arisen due to the present long-drawn UK procurement model. Financiers (banks/bonds/funds) struggle to give visibility to sponsors regarding what sort of margins they would be able to lend at since the time period between preferred bidder and financial close has been as much as three years, the Intercity Express project is a case in point. The N33 achieved financial close in a little less than three months after its preferred bidder was announced.

It will be interesting to see what role pension funds play overall in the European infrastructure financing market, but for now it's encouraging to see the Netherlands make new beginnings - even if they're modest ones.

Advisory Roles

PwC was financial adviser to the authority, Pels Rijcken & Drooglever Fortuijn was legal adviser and DHV was technical adviser.

BAM PPP was advised by KPMG while legal counsel was given by De Brauw Blackstone Westbroek. BDO acted as model auditor.

For the lenders legal advice was provided by Nauta Dutilh, Mott MacDonald gave technical advice while AON Global Risk Consulting provided insurance advice.

Snapshots

Transaction Snapshot

N33 Assen-Zuidbroek Road PPP


Financial Close:
22/11/2012
SPV:
Poort van Noord
Value:
$168.94m USD
Equity:
$15.35m
Debt:
$153.59m
Debt/Equity Ratio:
91:9
Concession Period:
22.50 years
PPP:
Yes
Full Details