On October 17 2018, the project financing of the €1bn Blankenburg Connection near Rotterdam, the Netherlands, reached financial close. It will be financed by a public-private partnership (PPP). By Daphne Broerse and Annemarie Creutzberg, Norton Rose Fulbright LLP.
2018 was a great year for PPPs in the Netherlands, as two large motorway projects reached financial close. The first was the widening of the A13/A16 motorway between Rotterdam and The Hague. The second was the Blankenburg Connection, which connects two of the essential motorways around Rotterdam, the second largest city in the Netherlands.
The contracting authority for the Blankenburg Connection project, the Directorate-General for Public Works and Water Management (Rijkswaterstaat), awarded the DBFM agreement for this project after a tender based on a competitive dialogue to the BAAK Consortium consisting of Macquarie Capital, DEME and Ballast Nedam. Under the DBFM agreement, BAAK undertakes to design, build, finance and maintain the new motorway and tunnels over a period of about 25 years.
As with all recent PPP projects, the Blankenburg Connection project will be financed through a special purpose company (SPC) that will be the counterparty to the contracting authority. Through this SPC, a syndicate of lenders will provide financing of approximately €900m to be made available during the construction phase of the project in accordance with a drawdown schedule that has been tailored to fit the expected expenditure during that period.
For this project, the equity of the SPC has been provided by the three consortium partners: Macquarie, DEME and Ballast Nedam, with Macquarie investing 70% of the equity and DEME and Ballast Nedam each investing 15%. This equity will be provided in the form of debt subordinated to the financing provided by the financing banks.
The financing will be provided by international and national banks and institutional investors, being Sumitomo Mitsui Banking Corporation and MEAG, the European Investment Bank, Bank Nederlandse Gemeenten, KBC Bank, Belfius, KfW, Natixis and two South Korean financiers, Korean Development Bank and Samsung Life Insurance. It is the first time South Korean financiers have been involved in a financing in the Dutch PPP market.
The construction phase carries the highest risk for lenders as repayment of the financing is dependent on the cashflow that the project will generate following completion. As is typical for any PPP project, the financing is structured to limit the risk to the financing banks by means of a combination of security provided over the assets of the SPC and contractual controls over the SPC.
This includes routing all cashflow through one of the banks, the provision of contractual information and consent rights to the financing banks, and step-in rights in respect of the DBFM agreement and subcontracts to enable the financing banks to safeguard the successful completion of the construction phase and continuation of the project.
The Blankenburg Connection is a large and complex project, fitting a three-lane motorway in-between two existing motorways, the A15 and A20. The project involves a new motorway connection of approximately 4km, linking the A15 and the A20 roads to the west of Rotterdam, including a land tunnel of approximately 500m, the Holland Tunnel, an immersed tunnel of approximately 900m, the Maasdelta Tunnel, two major flyovers and the widening of the existing A20.
Following a construction period of 5.5 years, the consortium will then maintain the new road connection for 20 years. Currently, preparatory works have started on site to create access by land and water.
In the design and construction of the Blankenburg Connection, the interests of key stakeholders including the government, businesses and local residents are at the forefront. With smart technical solutions, the consortium aims to limit the impact for the environment and businesses.
For example, the consortium will create the immersed tunnel with only two elements instead of the intended six elements in the reference design. As a result, the waterway – the connection to Main Port Rotterdam – will need to be closed off less often. Furthermore, building materials are supplied via water and where possible techniques providing less noise will be used.
The DBFM agreement for the Blankenburg Connection is based on the standardised DBFM agreement, version 4.3. The standardised DBFM agreement has been developed over the course of the past thirteen years, since the first use of the standard agreement for the Second Coentunnel project in 2005.
Since then, the agreement has been developed through several consultation rounds between the contracting authority and the construction companies, lenders and investors that are active in the Dutch market. Most recently, version 5.0 of the standardised DBFM agreement was published in June 2018.
The standardised DBFM agreement used as the basis for PPP projects means that the parties involved - contracting authority, bidding consortia and financiers - have certainty on the material provisions of the DBFM agreement.
Due to the standardisation in place, bidding consortia are aware – even before they enter a tender – what the risk allocation between the parties will be, how the payment mechanism shall work and how delay events, compensation events and force majeure events can impact planning and budget.
This upfront certainty has a positive impact on the success of the tender procedure. Experiences from earlier projects have been fed into the standardised DBFM agreement to keep it concrete and up-to-date.
However, as with all standardisations, one has to be careful that project specifics are not overlooked or underestimated. The use of the standardised DBFM agreement should not prevent the option of discussing project-specific aspects that require an amendment to the standardised DBFM agreement.
During the dialogue sessions between the contracting authority and the bidding consortia, the use of the standardised DBFM agreement provides the ability to focus the discussions on those specific items, ensuring that the DBFM agreement is tailored to the needs of the specific project.
In the tradition of DBFM agreements, the consortium will pass down all its obligations relating to the design, build and maintenance (DBM) of the building down to a subcontractor, in this case the EPCM contractor. This is well-known in the Dutch PPP market as the back-to-back principle.
Under this principle, all obligations and risks the consortium has under the DBFM agreement, save for the financing obligations, will be borne by the EPCM contractor. In addition, any rights the consortium has or any relief of obligations it receives under the DBFM agreement will also be passed down. Therefore, the system of compensation events will also benefit the EPCM contractor.
An interesting aspect of the Blankenburg Connection project is that, contrary to the standard back-to-back principle, the consortium has only passed down the maintenance obligations to the EPCM contractor up to a certain phase in the project.
Once that phase is reached, the consortium will take back the obligations it has under the DBFM agreement for the maintenance of the project and will become a self-maintaining SPC. This has led to the inclusion of a more detailed and extensive system for cooperation between the consortium and the EPCM contractor and a special team has been set up to oversee the smooth transition of maintenance obligations from the EPCM contractor to the consortium.
There was one specific circumstance that characterised the process towards financial close for this project: the establishment of the irrevocable Route Decree, Tracébesluit. The Route Decree allows for the planning permission of large infrastructural works.
The initial Route Decree was based on the programmatic approach to tackling nitrogen deposition (Programma Aanpak Stikstof; PAS). However, as there was a judgment pending at the European Court of Justice in relation to the PAS, with an uncertain date for conclusion, the Minister of Infrastructure and Environment decided to publish an amended Route Decree in October 2017. This created the possibility for new objections to the Route Decree and at contract close in December 2017, the Route Decree was not yet irrevocable.
As it was still uncertain at the end of 2017 when the Route Decree would become binding, several provisions were included in the DBFM agreement that allowed the parties to postpone certain deadlines in the DBFM agreement or, in a worst case scenario, to terminate the agreement if the Route Decree was not obtained by a certain date.
Through these mechanisms, the parties were able to sufficiently postpone various obligations under the DBFM agreement until the Route Decree became irrevocable in July 2018. From that point onwards, the consortium and the contracting authority could fully focus on the achievement of financial close.
The future of DBFM motorways
As mentioned above, two large motorway projects have closed in 2018, of which the Blankenburg Connection is the most recent. At the moment, there are only two motorway projects in the pipeline in the Netherlands, which will be tendered based on a DBFM agreement. These are the ViA15 motorway project and the A9 Badhoevedorp–Holendrecht motorway project.
Both these projects are relatively large projects in the Dutch market and it will be interesting to discover which project-specific deviations from the standard DBFM agreement will be implemented in each of the projects.