Gérard Adsuar

Max-Henrik Blom

SVP Finance and Treasury

VP Project Finance

EADS Christian Unrath

Paul Millington

VP Structured Project & Sales Financing

Business Development Director

EADS

Paradigm SECURE COMMUNICATIONS

PFIs & their Implications for EADS: The Paradigm Example Third Annual Global Investor Forum Toledo, Spain – June 21st & 22nd, 2004

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PPP? PFI? What are they? • PPP (Public Private Partnership): a method of

procurement where service provision takes centre stage – Applies to a wide range of capabilities qualifying as “a service”

• PFI (Private Finance Initiative): a subset of PPPs – Includes capital investment in addition to operations & maintenance – Financial engineering is only one of PFI’s many facets

2 PFIs & their Implications for EADS: The Paradigm Example

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Why Do Customers Require PFI? • Value for money • PFI allows for asset-sharing between several users • Only pay services received, subject to proper incentive

scheme • Spreading payments to resolve budgetary constraints

3 PFIs & their Implications for EADS: The Paradigm Example

The Golden Rule of PFI is … Government customer Project Agreement Equity

Senior Debt Project Company (“SPC”)

Sponsors

System Prime Contract Prime Contractor

Lenders

Service Contract Service Co.

… risk allocation, risk allocation, and risk allocation!

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PFIs & their Implications for EADS: The Paradigm Example

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From Concept … to Paradigm • Over 15 years – October 2003 to February 2018 • Paradigm provides “beyond-line-of-sight” end-to-end, tariff based,

resilient, secure communications services • Exclusive provider to the UK MOD and other military customers • Including other countries and organisations – Paradigm took over the operation of Skynet 4 Satcom sites on 30 May 2003 – “Readiness demonstrations” proved Paradigm’s ability to deliver milsatcom services – Demonstration carried out during Iraq conflict and high levels of solar activity – Transition risk was minimised by utilising existing processes and employing ex service operators

Paradigm now delivering all military satellite communications to UK Armed Forces worldwide

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PFIs & their Implications for EADS: The Paradigm Example

From Concept … to Paradigm SKYNET 4

SKYNET 5

Air Terminals Land Transportable Terminals UK Control Centres Ship Terminals

& Manpacks Overseas Bases Submarine Terminals

Military Communications over Commercial SATCOM Bearers 40 Satellite Access Cabins

>23 million minutes in 2003

>1000 Iridium and Globalstar terminals 6

PFIs & their Implications for EADS: The Paradigm Example

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From Concept … to Paradigm Communications Services

SKYNET 5 Services

Terminal Services

Miscellaneous Services

Operational Planning Order Planning Order fulfilment Service Assurance reporting Network and system monitoring Billing and collections Customer Care

Supplementary Services

Customer Services

Point to point Circuit switched IP / packet switched Broadcast Cell switched Devolved service

Land Terminals Ship Terminals Baseband subsystems Existing terminals Training Consultancy Geolocation Terminal Certification Terminal Manning

Welfare services Commercial services to ships TCS Oakhanger site mangt NATO satellite control Deployed Networks

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PFIs & their Implications for EADS: The Paradigm Example

From Concept … to Paradigm

POYNTON Military Terminals

STEVENAGE Satellite design and build Platform subsystems Clean Rooms Satellite Assembly Hall

COLERNE SGS Fallback Ops Centre

CORSHAM/HAWTHORN Main Operations Centre (NCC, SCC & Customer Ops)

OAKHANGER SGS Fall Back Ops Centre TCS Oakhanger Logistics Centre SatCom Training School

PORTSMOUTH Payload equipment Space Radar Clean Rooms Test Facilities Antenna Ranges

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PFIs & their Implications for EADS: The Paradigm Example

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From Concept … to Paradigm

Managing Director

Managing Director ~40 people

Malcolm Peto

~130 people +~300 Serco

Project

Legal

Commercial

Andy Stroomer

(PSC and PSL) Didier Ardaine

(PSC and PSL) Alison Helman

Finance James Beazley

Peter Bruton

Network Management

Technical Management

Aidan Joy

Colin Stickland

Engineering & Operations

Customer Operations

Process and Quality

Rick Greenwood

Chris Galasinski

Steve Lawrence

Service Business Development Ken Hadfield

Business Development Paul Millington

Finance Jackie Pritchard

9 PFIs & their Implications for EADS: The Paradigm Example

From Concept … to Paradigm

Support

Procure Elements

Terminals

System Definitions

Equipment

Required Capability

Satellites

Military Requirement • Procurement Cycle every 12 years • Systems not Services • Hardware not military effectiveness

From Hardware To Services Military Requirement

Service Delivery New Technology

Upgrades

Support

Terminals

Equipment

Satellites

System Definition • 15 year concession • Close customer relationship • New services to meet new needs • Secures long term business (EADS Astrium , Cogent)

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PFIs & their Implications for EADS: The Paradigm Example

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A New Business Model? Why? • Value for Money

• Assumption of 3 rd Party Revenue

• Transfer of Risk

• Minimise interfaces, performance

• Increased infrastructure

• Extended boundary

assured at the service level and services • Long Term View

• Optimise through life costs

• Projects on time to budget

• Time imperative to access

revenues • Private sector experience

• New solutions – Welfare, deployed

and innovation

networks

• Maintenance of Assets

• Protection of revenue earning

• Competition

• Asset provider turned service

capability company • Control with Public Sector

• Military – it’s a necessity

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PFIs & their Implications for EADS: The Paradigm Example

But Concretely, what Benefit to EADS? • Extension from core markets into long term service

contracts • Leverage design, build expertise and allow continuity until

Skynet 6 competition

• Ownership of Skynet 5 (and Skynet 4) System gives a

pivotal role in C4I • Establish leading expertise and experience in defence PFI

12 PFIs & their Implications for EADS: The Paradigm Example

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And what’s in it for Bankers?

ü Minister of Defence “Procurement Award for Smart Acquisition” ü Infrastructure Journal “Deal of the Year” ü Thomson Financial PPP “Deal of the Year” ü Project Finance European Defence “PPP of the Year”

13 PFIs & their Implications for EADS: The Paradigm Example

How do Bankers Regard PFIs? What Risks can Lenders Take? • Each party bears the risks it can best manage – Lenders averse to construction & completion risks of untested systems or technologies – Volume & market risks difficult to assess on defence systems, impose a customer “Take-or-pay” commitment • “Banks are more downside-sensitive” – … because they have no share in the upside! – Debt cover ratios such that a project can sustain cash flow reductions before lenders are affected – Market standards are important: ability to sell down is critical

14 PFIs & their Implications for EADS: The Paradigm Example

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Is PFI well Suited for EADS’ Offering? • Offer must qualify as a “service” – PFI more than just a means of funding an asset

• Technological risk must be limited – Mitigated by experience & competence

• Cannot apply to military “core business” – Asset survivability and value

Good fit to PFI: • Simulation & training • IT & telecommunications • Logistics & support

15 PFIs & their Implications for EADS: The Paradigm Example

Is PFI well Suited to all Defence Applications? • PFI imposes unacceptable constraints for frontline

operations – PPP & PFI must take into account chain of command and military service discipline before even being considered – Very specialized assets, used in a “rough” environment • But well suited for supporting operations • PFI are NOT widely applicable to Defence procurement – MoDs recognise PFIs have high financing costs (incl. documentation) – UK PPP/PFI less than 5% of MoD spending – Non-UK PPP/PFI between 0% - 1% of MoD spending 16 PFIs & their Implications for EADS: The Paradigm Example

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The EADS Philosophy: Financial Principles Regarding PFIs • EADS committed to optimized service solutions –

including outsourcing – to defence forces and public safety agencies • EADS committed to finding appropriate financial solutions

for customers

• EADS objective: Protect balance sheet, minimize

exposure – Non-recourse debt wherever possible – Minimum equity investment – Later sell-downs enabled – Minimum target returns 17 PFIs & their Implications for EADS: The Paradigm Example

How do we Control Risks in PFIs? • EADS Commercial Committee presided by CFO • Representation on project company boards • EADS employees staff project companies • Effective Risk Management: appropriate risk sharing with

customers and JV partners • Standard contract controls as per EADS procedures • Nurture in-house PPP & PFI competences. Lessons

learned on Paradigm applied to new opportunities

18 PFIs & their Implications for EADS: The Paradigm Example

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Skynet 5 / Paradigm Hinges on a Strong Customer Commitment 70 TOS

IOS

INOS

FOS

Third Party Revenue

60

£ Mion per quarter

MOD beyond “Take or Pay” 50

40

30

MOD: Robust “Take or Pay” 20

10

- 16

-17 De c

-15

De c

- 14

De c

- 12

-11

-13

De c

De c

De c

-1 0

De c

-0 9

De c

-0 8

De c

-0 7

De c

- 06

De c

-04

-03

-05

De c

De c

De c

De c

De c

- 02

0

Third party revenue (e.g. NATO) constitutes upside!

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PFIs & their Implications for EADS: The Paradigm Example

Skynet 5 / Paradigm Exposure Reduction Over Time 1.200,00

1.000,00

in £ M

800,00

600,00

MOD maximum liability at year-end

400,00

200,00

Net exposure of EADS (full recourse) 0,00 2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

20 PFIs & their Implications for EADS: The Paradigm Example

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Conclusion • PFIs more than a financial tool: only make sense when

service or asset-sharing provides value to the customer • Sovereign credits can access cheaper sources of

financing, and we encourage them to opt for classical procurement • Limited Defence applications due to frontline operations

and chain of command issues: PFI will not be core to EADS

• Suitable risk allocation is key EADS criteria • Balance sheet protection: non-recourse debt whenever

possible; minimal equity investment over time 21 PFIs & their Implications for EADS: The Paradigm Example

Conclusion • Current Portfolio – SkyNet5 / Paradigm (UK) • Going Forward – FSTA (single bidder - UK) – NH90 helicopter training simulator (preferred bidder - Germany) – Galileo (3 bidders - Europe)

22 PFIs & their Implications for EADS: The Paradigm Example

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PFI Benefits delivered today 23 PFIs & their Implications for EADS: The Paradigm Example

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