E18 Muurla - Lohja Motorway Project

1 TEN - T Project finance & PPPs

Experiences from a Finnish PPP project using project life-cycle management from the order perspective to maximise efficiency

Matti Vehviläinen Finnish Traffic Agency

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Director General Juhani Tervala

Communications Director General’s Staff Internal Audit Anna Jokela Timo Hiltunen Marja-Liisa Peltomaa

Transport System’s Maritime Department Rail Department Road Department Administration Department Raimo Tapio Ossi Niemimuukko Jukka Hirvelä Department Anne Herneoja Hannu Mäkikangas

• Transport • Sea Traffic • Rail Traffic • Road Operations • Economy Management Management • Development • Road Investments • Personnel • Public Transport • Waterways • Railway • Road and Bridge • IT/ICT • Hydrographic Office Investments Engineering • Administration • Rail Network • Road Traffic • Information and Centres Archives

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Use of the life-cycle model in Finland

‰ Decision-in-principle of the Finnish Government’s Ministerial Committee for Economic Policy 12/2003: The life-cycle (PPP) model can be used for traffic infrastructure projects

‰ The Ministerial Committee’s decision in February 2004 on use of the life-cycle model for the E18 Muurla - Lohja motorway project

„ Good experiences with the life-cycle model in Finland and internationally.

„ The EU promotes use of the life-cycle model for traffic infrastructure construction.

„ Quick completion of the project is particularly important, and the life-cycle model makes faster completion possible.

„ Preliminary calculations indicate that the life-cycle model is the most economic overall solution.

„ The life-cycle model provides the opportunity to implement other traffic infrastructure projects in the near future.

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Life-cycle Contract logical step DBFO

??? DBMO

DB Plus Financing

Design-Build B Plus Long-Term Maintenance & Design-Build Upkeep Integrated Design & Traditional Construction Design-Bid-Build (Public Funding) Life-cycle Consideration Life-cycle Responsibility

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Procurement model of E18

„ Finnish application of the PPP model: life-cycle model „ The client orders the long-term service entity by means of a service contract - Contract period autumn 2005 - autumn 2029 „ The service provider must establish a special purpose company (SPC) to take responsibility for construction design, construction, maintenance and financing. „ The service requirements are described as

„ performance specifications (top surface of the road, environmental factors, fittings and equipment etc.)

„ technical product requirements (long-term structures) „ The payment mechanism combines the quality and quantity of services produced with the service fee

„ availability of service defines the basic amount

„ monitored criteria create variability

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The client´ s cashflow in traditional (DB) and life-cycle model

90

80 PHASE 1 OPENED STDB MODEL-MALLI 70 PHASE 2 OPENED 60 ELINKAARIMALLILIFE-CYCLE MODEL

50

40 D

30

20

10

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Years

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GROSSGROSS SERVICE SERVICE PAYMENT PAYMENT (Price of the service when quality at agreed level)

AVAILABILITY PAYMENT AVAILABILITY PAYMENT PERFORMANCEPERFORMANCE PAYMENT PAYMENT

MeasurementMeasurement of of the the Service Service

Availability Performance Unavailability ƒ Maintenance ƒ Extent and duration ƒSurface Condition ƒ Location ƒ Fixed dates ƒ Time Period ƒ Failures

DEDUCTIONSDEDUCTIONS Maintenance Compensation SafetySafety Performance Performance Maintenance Compensation - Traffic volume higher -Accidents-Accidents compared compared - Traffic volume higher than expected toto reference reference roads roads (Price of the service according to quality) than expected -Safety-Safety bonus bonus NETNET SERVICE SERVICE PAYMENT PAYMENT

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E18 Muurla-Lohja the 2nd PPP project of FINNRA

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E18 Muurla - Lohja

„ Part of the Nordic Triangle, prioritised by the EU „ Currently a two-lane highway that is geometrically poor: weak traffic safety and smoothness of traffic „ Conversion to a motorway on the basis of legally valid road plans (12/2003) „ The order authorisation 700 million euros (budget of the State in 2004, nominal value)

13.10.2009 /M.Vehviläinen E18 Muurla - Lohja motorway 10

Muurla-Lahnajärvi section open to traffic in 2008

Lahnajärvi-Lohja section open to traffic in 2008

Muurla grade Separated intersection Kruusila grade separated intersection Suomusjärvi grade separated intersection Lahnajärvi grade separated intersection Sammatti grade separated intersection Nummi grade separated intersection Karnainen grade separated intersection Lempola grade separated intersection

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13.10.2009 /M.Vehviläinen 12 Hepomäki 270 m Lakiamäki 430 m Tunnels Tervakorpi 560 m Pitkämäki 595 m Orosmäki 600 m Karnainen 2200 m Lehmihaka 300 m

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Complemented road plan

„ Extensive, documented soil and bedrock surveys „ Basic road plan solution with updated starting information „ Degrees of freedom in the plan – for example, motorway altitude 0 - ± 2 m „ Absolute boundary conditions - environmental impact „ Graphic thematic maps „ Starting points for risk management (plan solutions)

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Schedule for the bidding process

2004 2005 2006 1234567891011121234567891011121234567891011 12

13.2.2004: decision on applying life-cycle model

6.3.2004 procurement announcement

30.7.2004 12.00 deadline for pre-qualification registration

preparation of the bidding documentation

calculation period

opening the bids

negotiations

service contract

contract period until 2029

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Shortlisted bidders

- Bouygues Travaux Pub- lics France - Kesälahden Maansiirto and Oy Finland (- NCC Roads aliurakoitsijana) - Cintra Concesiones de Infrastructuras de Spain Transporte, S.A and - SRV Teräsbeto ni Oy Finland (- Ferrovial Agroman aliurakoitsijana)

- Tieliikelaitos Finland - YIT Rakennus Oy

Tieyhtiö Ykköstie Oy: - Skanska BOT AB Sweden, - Laing Roads Ltd UK and - Lemminkäinen Oyj Finland

- Vinci Concessions France

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Structure of contract (investment period)

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Status of the project

„ Motorway opened for traffic in two phases : 19th Nov 2008 and 28th Jan 2009, due date for both phases 15th Nov 2008 „ short delays because of difficulties related to traffic management and tunnel safety systems „ investment period closed Jan 2010, yet some problems remaining in the functionality of the traffic management system „ the interface between the client´s traffic center and the Road Company challenging „ conclusion: more accurate technical requirements for definition of traffic management and tunnel safety systems instead of performance specifications

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Objectives set for the PPP model E18 Muurla-Lohja, Invitation to tender October 2004

„ Quickly opening the motorway for traffic „ Good traffic safety --> motorway standard, payment mechanism „ Reducing congestion Æ similar to traffic safety „ Top-class road maintenance services for road users --> technical requirements for the maintenance period, and availability/service level as payment mechanism bases „ Optimal allocation of risks (administrative/technical risks) „ Economically most advantageous approach

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Overall economy of the E18 Muurla – Lohja contract

ƒ Main benefits of the life-cycle model in comparison to budget-financed implementation ‰ quick and cost-effective construction ‰ degrees of freedom made possible by responsibility period of more than 20 years ƒ Reasons for quick implementation ‰ initiation of service fees only after the road is taken into use encourages the designers, builders and sponsors to focus on quick implementation in a competitive situation ‰ the private sector has more flexible and free procurement procedures compared to the public sector ‰ the private sector also has better capacity to optimise financing during construction ‰ efficient project management and capacity to react quickly to the need for changes direct the entire value chain of the project towards optimal implementation ƒ Net present value savings in investment, maintenance and financing costs of about 3.5 % ƒ In addition, savings in driving costs of about EUR 34 M

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E18 Muurla-Lohja (”Public Sector Comparator 2”)

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Starting points for procurement preparation of new PPPs

„ Utilising documentation and experience obtained from the E18 Muurla-Lohja project „ Focus areas in development of agreement documents

„ More specific preliminary funding solution planning

„ Possibly compressing the service agreement, potential changes caused by the funding solution, assessing allocation of risks

„ Simplifying the payment mechanism

„ Developing technical requirements based on a post-analysis, possible changes pertaining to the allocation of risks

„ Clarifying the traffic management system and the related technical requirements, interface to the Traffic Centre, period of liability

„ Road company's role in controlling and managing technical quality

„ Co-operation between client and service provider

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Objective for the E18: Achieving motorway level by 2015 in compliance with approved EU-level plans

Project Road Cost est. 2009 2010 2011 2012 2013 2014 2015 2016 H1 Mw 1 Muurla-Lohja, completion 2009 299 H2 Ring III Vanhakartano-Lentoas.tie 255 H4 Mw 7 Hamina Bypass 175 H3 Mw 7 Koskenkylä-Loviisa-Kotka 285 H5 Mw 7 Hamina-Vaalimaa 196

= PPP project (actual construction time) = direct budget funding (actual building time) = PPP project (completion time)

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TEN- T support of E18 Muurla -Lohja

„ E18 Road (part of Nordic Triangle priority project, PP12) „ E18 has been supported via 16 different TEN-decision since 1995 (studies, Interest rebates, direct grants) for various sections „ Finland worked several years to achieve possibility to apply PPP support

„ Finnish approach for PPP (Life-cycle based availability payment fee) was not typical PPP application and the EU legislation did not allow to proceed until the TEN regulation was updated in 2007. „ PPP was applied first time for E18 Muurla – Lohja section at 2007 (Multi-Annual Programme)

„ Not successful / Justification: Not a key bottleneck on PP12. „ Application was send again in 2008 for Annual Programme

„ Strong emphasis on PPP pilot action

„ Successful / Justification: The project will be implemented as a long term life cycle based PPPmodel in an availability payment scheme. As this project is the first in of this kind in Finland the preparation phase was taken very seriously and comprehensive. The project is coherent with the envisaged purpose and has good technical descriptions of the works to be performed.

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„ “Community financial 7.790.000 euro is hereby granted to the Beneficiary, in the framework of an availability payment scheme” „ The Commission shall contribute a maximum amount as indicated in Article 2 of this Decision, equivalent to 10 % of the estimated total eligible costs for works indicated in paragraph 2. „ The request will cover only the availability payments' part corresponding to the works carried out and shall be accompanied by a certification by the Member State that the expenses claimed have actually been incurred. The Beneficiary shall also provide evidence that the corresponding part of the infrastructure has been delivered, and a copy of the public-private partnership contract. „ The end date shall be the date when the accumulative amount of the availability payment part corresponding to the works reaches the amount of the Community financial aid. It shall not be later than 31 December 2009.

13.10.2009 /M.Vehviläinen Reporting 25

„ 1. Cover sheet • „ 2. Final Report and Financial Statement, Required documentation: „ 2.1 Final Report and Financial Statement, part 1 • Financial and technical „ 2.1 .1 Invoices and payment copies „ 2.2 Final Report and Financial Statement, part 2 statements (commission „ 3. Certificates and statements forms) „ 3.1 Proof of the project total cost „ 3.2 E18 Muurla–Lohja LCC Service Agreement Certificate of Completion • Invoices of payments „ 3.3 Confirmation of the cost breakdown „ 4 Contract documents • PPP concession contract „ 4.1 E18 Muurla - Lohja LCC Service Agreement Tender Invitation Document 1 Service Agreement • Environmental monitoring „ 4.2 E18 Muurla–Lohja LCC Service Agreement Tender Invitation Document 2, Project Description, Updated 28 February report „ 4.3 E18 Muurla - Lohja Service Agreement Tender Invitation Document 3 Payment • Summary of annexes => Mechanism „ 4.4 Records of the inspection of the Agreement Area on 18 August 2005 and the • Agreement Documents on 22 August 2005 Bi-lateral discussion with „ 4.5 Main schedules of Construction and Maintenance (a preliminary general schedule as of 30 March 2005 and a schedule for the operation and Agency: maintenance work as of 22 August 2005 / 3 October 2005) „ 4.6 E18 Muurla–Lohja LCC Service Agreement, Design and Construction • Site-visit and preliminary Documentation, Updated on 28 February evaluation on existing „ 4.7 E18 Muurla–Lohja LCC Service Agreement Tender Invitation Document 8, Technical Requirements, Updated on 28 February 2005 documentation „ 4.8 E18 Muurla – Lohja (Right of Way plan as supplemented) „ 4.9 E18 Muurla – Lohja (annex 10, List of Instructions (and other • Agency comments on the documents specified in such list)) documentation „ 4.10 E18 Muurla–Lohja LCC Service Agreement Tender Invitation Document 4, Complementary terms and conditions of the Service Agreement • Collection and submission of „ 5. E18/Highway 1 Muurla - Lohja (–Lohja (Lieviö), Summary of monitoring of flying squirrels 2001-2009 final report material „ 5.1 Maps

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Thank you for your attention !

13.10.2009 /M.Vehviläinen