Squaring the Circle – Improving European Infrastructure Financing by the EFSI Baltic Ports Conference

Riga, September 4, 2015

Contents

Page

A. One trillion in investment needs

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B. Making the most of "Juncker" for Baltic ports

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This document shall be treated as confidential. It has been compiled for the exclusive, internal use by our client and is not complete without the underlying detail analyses and the oral presentation. It may not be passed on and/or may not be made available to third parties without prior written consent from Roland Berger Strategy Consultants. RBSC does not assume any responsibility for the completeness and accuracy of the statements made in this document. © Roland Berger Strategy Consultants

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A. One trillion in investment needs

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Approximately EUR 1 trillion will be needed by the EU for infrastructure investments within the next three years The estimated investment needs in infrastructure to 2018 amount to EUR 1 trillion

EUR 1 tn investment needs (to 2018) EUR 30 bn (p.a.)

EUR 200 bn (p.a.)

More than EUR 200 billion is needed each year to develop power supply systems if the EU is to meet agreed energy policy targets The financing needs for developing broadband networks to 2020 is EUR 30 billion a year

EUR 1.5 tn (by 2030)

Source: European Commission, Standard & Poor's

EUR 1.5 trillion more is needed by 2030 for extending transport infrastructure in the EU

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Regular investments are required for Baltic Ports to sustain competitiveness – One focus is construction of new LNG terminals Main ports and selected ports projects in the Baltic Sea [Estimated Capex, EUR m] Member Ports of the Baltic Ports Organization

Ust Luga: Urban Development

Kemi

1,775

Oulu

St. Petersburg: New Port Development

Umeå

Vaasa Sundsvall

Pori

Naantali

Rauma Turku Hanko

Stockholm Oxelösund Norrköping Kalmar Karlshamn

3 4

7

Klaipėda Gdynia Gdańsk

1 6 Rønne 5 2 Stralsund Aabenraa Lübeck Rostock Świnoujście Wismar Szczecin

Source: IJGlobal, Press

Helsinki Ust-Luga Tallinn

Kuressaare Ventspils Riga Liepāja

Gothenburg Aarhus Fredericia

Hamina Kotka

1.) Copenhagen 2.) Gedser 3.) Helsingborg 4.) Malmö 5.) Rødby 6.) Trelleborg 7.) Ystad

807

Gdansk: Container Terminal Expansion/ Deep Sea Terminal Värtahamnen: Port Reconstruction

538 285

Kaliningrad: Customs and Transport Infrastructure Cluster

189

Skulte: LNG Terminal

149

Riga: Port Relocation

148

Gdynia: Port Infrastructure

145

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Large investments in European ports' infrastructure are required in the next years while available direct EU funding is reduced Port investment needs and available public funding National budget constraints Several EU member states face severe financial problems and

impose strict budget cuts – Across the EU-28, national infrastructure investments have

EUR 9.8 bn investment in port infrastructure

been reduced by 10% from

required from

2010 to 2013

2014 to 2020

Reduced direct EU funding As part of the Guarantee Fund for the EFSI, EUR 2.7 bn will be removed from the Connecting Europe Facility transport budget – This means -18% in budget for non-cohesion countries in 2014 – 2020

Challenges for European ports: > Large investments need to be realized to maintain competitiveness while direct funding is getting more scarce > Attracting private investments requires dedicated and thorough preparation and attractive business cases Sources: ESPO; Roland Berger

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We see three main challenges for Baltic ports in the years ahead for which the EFSI can be a potential solution

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Ports face large investment needs in the coming years (deep water access, larger throughput, hinterland connections, LNG, greenery) – while they report increasing difficulties in obtaining sufficient funding

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Strong competition (>200 Baltic ports) and weak markets (logistics in general, Russia in particular, Fehmarn Belt perspective) makes it hard for ports to create sufficient revenues to realize large investments

3

National government budgets are and will continue to be under pressure (low investment into infrastructure) and European state aid regulation limits room for direct support

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B. Making the most of "Juncker" for Baltic ports

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The European Fund for Strategic Investments (EFSI) aims at overcoming the current deadlock in European infrastructure financing EU guarantee EUR 16 bn

European Investment Bank (EIB) EUR 5 bn

European Fund for Strategic Investments EUR 21 bn Infrastructure and innovation approx. EUR 16 bn

EIB group leverage

deployed by EIB

Signatures approx. EUR 49 bn Catalytic effect

Final investment approx. EUR 240 bn

x15 blended multiplier effect

> Expected to come operational in QIII 2015 for the next three years > It aims at catalyzing private investment into infrastructure by using public funds to absorb part of the project risks for private investors > EU guarantees enable the EIB to provide junior debt financing to risky infrastructure investment projects, thus enabling risk averse private investors to provide senior debt tranches > Projects have to present a viable business case to receive funding from the EIB and private investors – EFSI is not grant money! > A minimum of 50% of total funding has to come from private investors

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Projects are selected purely based on the merits of their business cases without national, regional or sectoral quotas Selection pillars

Evaluation factors/ dimensions

Contribution to EFSI policy objectives

Contribution to general objectives in key policy areas (Article 9(2) Regulation (EU) 2015/1017) – i.e. Transport, Energy, Environment, …

Quality and soundness of the project

Contribution to growth, ability to deliver project, assessment of environmental and social standards, employment creation, …

Technical and financial contribution

Value created by investment; viability of business case; (non-)financial benefits; leveraging private sector resources, …

Complementary indicators

Additionality, macro-economic environment of the project, multiplier effects, amount of private finance, cooperation with national banks, co-financing with European funds, ….

Despite some "soft" indicators: All projects will go through a bank style due diligence and need to stand up to scrutiny regarding structure of revenues, risks, business case Note: The discussion surrounding the EFSI still evolves and is subject to continuous amendments in the course of the ongoing legislative process

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Within the EFSI, ports will face strong competition from other infrastructure sectors – Projects viable for private investment required Challenges for ports in the future EFSI setup Competition for financing > The EFSI covers all types of infrastructures without defining a financing share for any particular sector – Different infrastructure sectors are competing for funding > No explicit preference for priority projects (e.g. TEN-T) – Business case for private investors is key criterion

Viable business case focus > Infrastructure projects need to offer an attractive business case for private investors as a key criterion for eligibility > Need to present mature projects with clear and stable revenue streams as well as low risks for private financiers in order to create a viable investment opportunity

> Understanding the needs of private infrastructure financiers and presenting projects as an attractive investment opportunity is a key success factor for ports to receive financing support from the EFSI > Established funding programs will stay in place, but if ports want to tap the potential of the EFSI, they need to prepare a structured investment pitch for private investors 11

Focus on market driven investment could increase competition around the Baltic Sea and spark consolidation Room for innovation in financing ports Stricter separation of infra-/suprastructure from operational business creates room for stable revenue streams for provision of infrastructure Use new types of investors (e.g. sovereign wealth funds from Middle East/Asia) can help to enter into partnerships with regional ports in those regions Consolidation of port landscape allows active financiers to leverage potential gains in effeciency and larger scale by merging operations and businesses of several ports Combination with investments into hinterland connections and other transport investments will allow some ports to improve their business

Expected result Availability of co-funding for those ports with a viable business case could result in a strong push towards consolidation around healthy ports Pressure on ports with a negative or marginal business case could increase

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Summary and outlook

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The EFSI offers a opportunity for the Baltic ports to unlock new financing sources required to reach an improved positioning in a highly competitive market

2

It offers a promising chance to re-structure and modernize port financing to compensate low public funding (to be expected to stay low in the medium term)

3

Project selection will focus on business case viability, thus requiring Baltic ports to develop attractive business cases for private investors with manageable risks

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Thorough project structuring, commercial validation and de-risking is required for ports to create attractive projects that will be successful in applying to the EFSI

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The promotion of investment into ports with a healthy business case could be a driver for an even stricter competition and spark consolidation around the Baltic Sea

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