Project Management and Finance

POLANDS A2 MOTORWAY

Group no. 08
Kumar Prashant (17/023) | Pritam Karmakar (17/031) | Sanjeet Kumar (17/042)

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Project Risk Mitigation Current Structure
Major Risk

Mitigation Measures under current structure

1. Variation in actual and

forecasted traffic

Concession agreement containing commitments from the Government to generate satisfactory

traffic volume by completing the Poznan bypass and compensating AWSA for completion delays,
not to build or improve any competing roads, not to impose toll on any feeder roads and to
maintain feeder roads

2. Variation in the major

inputs to the project
modelling like value of time,
traffic and revenue forecast,
PPP etc.

Extremely conservative approach by the WSA, lowering the value of driver time, perceived
operating costs, and higher speeds on alternative routes compared to the previous estimates which
resulted in 16% decline in revenue in 2002 and a 50% decline in 2022. All these was done to check
the project viability under extreme conditions

3. Interest rate risk due to

movement in 6-month LIBOR

Use of interest rate swaps to convert the floating rate to a fixed rate

4. Risk in debt servicing due

to lower traffic than the base
case scenario

Innovative cash sweep mechanism to ensure that extra cash flow was used to pay down senior
debt or to create a sinking fund account for repayment of the zero coupon bonds

5. Default in payment of
Mezzanine debt and zero
coupon bonds

The bonds were backed by guarantee from the Polish government for up to 800 million Euros in
maximum future value for the entire life of the concession. Thus AWSA would be able to refinance
the bonds

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Project Risk Mitigation
Major Risks

Risk bearers

Factors

1. Variation in actual and

forecasted traffic

AWSA, Development
Company (DC), Operating
Company

Revenue forecasts were based on these projections. Any deviation

might lead to shortfall in meeting the operating expenses or
service debt

2. Variation in the major inputs

to the project modelling like
value of time, traffic and
revenue forecast, PPP etc.

AWSA, Development
Company (DC), Operating
Company

This too as the above risk, would lead to deviations in the revenue
forecasts, which might lead to the same risks of shortfall in
meeting the operational expenses and service debt

3. Interest rate risk due to

movement in 6-month LIBOR

AWSA, Debt investors

This would lead to drastic increase in the interest component and

put strain on the cash flows making debt servicing more difficult

4. Risk in debt servicing due to

lower traffic than the base case
scenario

AWSA, Debt investors

This would generate less than expected cash flow and hence
reduce the debt service coverage ratio or even make the SPV go
bankrupt

5. Default in payment of
Mezzanine debt and zero
coupon bonds

Polish government , AWSA

In case of default, the polish government is liable to pay up to 800

million Euros as a guarantor of the debt to AWSA

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Project Risk Mitigation
Major Risk

Risk Mitigation Strategy

1. Variation in actual and

forecasted traffic

It is proposed to provide stimulants to the countrys economic growth through government business plans and
foreign direct investment (from other EU countries specially).Tie the tariff plan with the rates of inflation or the
GDP growth rate to promote the countrys industrial development.

2. Variation in the major inputs

to the project modelling like
value of time, traffic and
revenue forecast, PPP etc.

Engage advisory firm with prior relevant experience. Enter into agreements with banks to obtain mezzanine
debt and short term debt to meet the difficulties of the start-up phase of the project. Involve other international
firms to get a more accurate estimate for future traffics, incorporating the predictions on human development
and industrial advancements.

3. Interest rate risk due to

movement in 6-month LIBOR

To diversify the interest rate risk it is recommended to issue fixed-rate bond nominal pegged to inflation, so as
to ensure stability in the project. In addition, it would be useful to ask for help to the European Community and
the European Central Bank for an accurate rating of the project and the opportunity to be well received in the
market of public savings.

4. Risk in debt servicing due to

lower traffic than the base case
scenario

Monitor annually the performance of the cash flow and adjust the estimates in terms of new variables that come
into play.

5. Default in payment of
Mezzanine debt and zero
coupon bonds

Identify a possible exit strategy in case the project does not go through. hypothesize the entry of a private
investor determines that the units of the Government of Poland in order not to damage his reputation.

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Bankers Concerns

Revenue Projections (Passenger and Vehicles Projections):

- As per the past experience, the model assumed that the only 50% of the expected vehicles came on
the road once the project became operational
- This assumption seems considerate, given the fact that M1/M15 motorway saw only 35% of the
projected revenue coming in, while the A4 Motorway saw a 80% revenue realization.
Interest and Principal repayment:
- Required to maintain a minimum DSCR of 1.5x, but it showed an average of 1.99x
- The government provided 800 million worth debt backing
- Under a Cash Waterfall Mechanism, AWSA committed to build up a Debt Service equal to 6 months
accrued interest and next scheduled interest payment
- It also maintained a sinking fund account for the partial retirement of Zero-coupon bonds beginning
in 2012
Macro Factors showed positive signs which would benefit the A2 Motorway Plan
- The economy was expected to grow at 5% through 2002, by 4% till 2010, and by 3% thereafter
- Polish inflation rate expected to decline from 6% in 2000 to 2% in 2008
- The country had just been upgraded to BBB from BBB- credit rating.

Thank You