Microsoft Word - Intermediate report for discussion purposes
Dieses Dokument ist Teil der Anfrage „Ausschreibungen zum Bau des neuen Hauptquartiers in Warschau“
www.pwc.com Draft Analysis of financing & contract modalities in EU and Polish context Intermediate report for discussion purposes 17 July 2020
Contents 1 Definitions 2 2 Introduction 4 Background and objectives of the report 4 3 Executive Summary 6 Financial model assumptions and outputs 6 High level overview of the contact arrangements on Polish market 7 4 General Assumptions to the Financial model 8 Main assumptions 8 4.1.1 Currency of the financial model .........................................................................................................8 4.1.2 Timeline of the financial model..........................................................................................................8 4.1.3 Capital Expenditure ...........................................................................................................................8 4.1.4 Operating expenses (OPEX)............................................................................................................ 10 4.1.5 Financing ........................................................................................................................................ 11 4.1.6 VAT calculation in the final financial model (VAT paid / return). .................................................. 12 4.1.7 Assumptions to different modalities ............................................................................................... 13 4.1.8 Design and build ............................................................................................................................. 13 4.1.9 Design, build, operate and maintain ............................................................................................... 13 4.1.10 Design, build and finance ................................................................................................................ 14 4.1.11 Design, build, finance, operate and maintain ................................................................................. 14 5 Model output 15 Discounted NPV [FCFE in kEUR] – modalities' comparison 15 6 High level overview of the contract arrangements on Polish market 17 Legal basis 17 Build only or Design and Build contracting arrangements 19 Service contract under PPP 22 Recommendation for Project Management 23 7 Appendices 25 Intermediate report for discussion purposes’ 1
1 Definitions Definitions Elaboration Civil Code Journals of law no.2019.0.1145 i.e. - Act from 23 April 1964 r. – Civil Code Contractor, Developer Company or consortium of companies that Frontex will hire to provide main services in relation to the building Report This report Feasibility Report, Final Report, Final Report Report summarizing the different possibilities to deliver the Frontex HQ Project, including their strengths and weaknesses and resulting in a recommendation on the use of any of the options in the best interest of the Agency First Report Report provided by PwC on 09.06.2020 concerning “Review of financing and contracting modalities available for Frontex’s new headquarters building” Financial Regulations Regulation (EU, Euratom) 2018/1046 of the European Parliament and of the Council of 18 July 2018 on the financial rules applicable to the general budget of the Union Frontex Financial Regulation Management Board Decision 19/2018 dated 23 July 2019 adopting the Frontex Financial Regulation Frontex, Agency, Client European Border and Coast Guard Agency (Frontex) Headquarters Agreement Agreement dated 9 March 2017 concluded between Frontex and the Republic of Poland HQ Building or HQ Frontex’s New headquarter building to be constructed on the Real Property Initial Capex Capital expenditures required for construction of HQ Building Maintenance Capex Capital expenditures required to maintain the shell and core, installations and equipment of the Headquarter Building in non-deteriorated state. OPEX Operating expenditures required for operating of HQ Protocol Protocol (No 7) on the Privileges and Immunities of the European Union Real Property Plot no. 5/7, precinct 146505_8.0115, located in Mazovian Voivodeship, Warsaw, Poland, for which the District Court for Warsaw-Mokotów in Warsaw, 7th Land and Mortgage Register Department, maintains the land and mortgage register KW no. WA2M/00520624/2 Service Contract Agreement between European Border and Coast Guard Frontex/NP/158/2020/RS Agency and PwC Advisory Sp. z o.o., Sp. K. for the provision of the Feasibility Study on real estate financing & contracting methods We PwC Advisory sp. z o.o. sp.k.; PwC Legal Pawłowski Żelaźnicki sp.k.; PricewaterhouseCoopers Polska sp. z o.o. sp.k Intermediate report for discussion purposes’ 2
Acronym Elaboration DB Design and build DBF Design, build and finance DBOM Design, build, operate and maintain DBFOM Design, build, finance, operate and maintain EBRD European Bank for Reconstruction and Development EIB European Investment Bank EU European Union EUR Euro GC General Contractor GLA Gross Leasable Area HQ Headquarters PLN Polish Zloty New PPP or 3P Public Private Partnership RFP Request for Proposal SPV Special Purpose Vehicle sqm square meter TCO Total Cost of Ownership VAT Value Added Tax Intermediate report for discussion purposes’ 3
2 Introduction Background and objectives of the report On the basis of the Service Contract – Frontex/NP/158/2020/RS PwC has agreed to prepare and provide to Frontex a report summarizing the different approaches, including their strengths and weaknesses together with a recommendation for the development of Frontex HQ building in Warsaw. In line with the request for proposal our work was divided into 3 main parts, 1. Review of different financing & contract modalities 2. Analysing financing & contract modalities in EU and Polish context 3. Feasibility Report Based on the findings of First Report, PwC has selected 4 modalities, that are presented below, that in our opinion are best suited for development of Frontex new headquarters building. Please note that a few legal and tax matters still have to be (or are being) clarified, that were pointed out in the report of 9th June: Contracting DB DBOM DBF DBFOM modalities GLA of the ca. 70 000 sq.m. building Number of 10 office floors, 1 technical floor and up to 2 level underground parking floors Construction 140m EUR Cost of the building (Hard costs + Fit out) Scope Design and Design and Design and Design and of services construction of a construction of a construction of a construction of building building and building building and financing a building, financing of maintenance and of the construction the construction and operation over an building maintenance extended time period and operation over an extended time period Tenancy/usufru No No Might be required, Might be required, ct to the depending on the depending on contractor and market response the market response lease back to Frontex External Debt or equity Debt or equity Equity Equity financing/equity financing possible financing possible Payment during Yes Yes No No construction phase Intermediate report for discussion purposes’ 4
payment in long term payment in long term instalments after instalments after completion (no lease completion (no lease option) option) or or rent during long term rent during long term lease, upon rent lease, upon rent termination settlement termination settlement of investment of investment expenditures (less expenditures (less already paid rent) already paid rent) The objective of this report is to analyse 4 modalities presented above, from the financial perspective. Based on discussions with Frontex, we understand and assumed that the HQ Building shall have the following parameters: ● Total Gross Leasable Area (GLA) of the building will be ca. 70 000 sqm (without underground floors) ● Building should facilitate space for at least 2 000 employees, with anticipated 35sqm of building space per employee (on average) ● The building shall be 9-10 storey high with 2 level underground parking for ca 1,200 cars ● The building shall be delivered by the timing when the current Frontex’s lease agreement at Warsaw Spire expires (Q4 2024) Based on selected market comparables, PwC assumes the construction costs (hard construction costs + fit out) for the Frontex HQ building to be ca 2000 EUR per sq m (ca 140 000 000 EUR including underground parking). PwC have developed a financial model based on which the selected modalities were compared in terms of the present value of the total costs associated with development and operations of Frontex HQ in each modality. Additionally, the report provides an overview of different tendering modalities and contract arrangements. The Report is divided into following sections: ● Executive Summary including the table describing briefly selected contracting modalities in case of Frontex HQ Project with legal and tax considerations (Section 3); ● Financial model assumptions (Section 4); ● Model output (Section 5); ● Review of the different tendering modalities and contract arrangements on the Polish market (Section 6). Intermediate report for discussion purposes’ 5
3 Executive Summary Financial model assumptions and outputs Contracting modalities DB DBOM DBF DBFOM Project currency EUR Project Timeline Construction Phase (Q1 2 022 to Q4 2024) and operating phase Q1 2025 to Q4 2039 Initial CAPEX 140m EUR (payments based on the Included in the concession fee milestones achieved – lump sum) 159m EUR (one off lump sum payment, after the completion of construction period) Maintenance CAPEX (in 16,2m EUR 17,9m EUR 16,2m EUR Included in nominal terms; sum) the concession fee OPEX (in nominal 34,1m EUR common 37,6m EUR common 34,1m EUR common Common area included values; sum) area area area in the concession fee 42,2m EUR rental 42,2m EUR rental 42,2m EUR rental area 42,2m EUR rental area area area Concession fee (in - - 1) 318,2m EUR 1) 368,5m EUR nominal terms; sum) 2) 265,7m EUR – 2) 316m EUR concession payments + concession payments + 87,5m EUR final 87,5m EUR final settlement settlement Initial CAPEX financing 1) 75% Debt+ 25% 1) 75% Debt+ 25% Equity Equity Equity Equity 2) 100% Equity 2) 100% Equity 3) 75% Debt+ 25% 3) 75% Debt+ 25% Equity Equity 4) 100 Equity 4) 100 Equity Maintenance CAPEX Equity Equity Equity Equity and OPEX financing Length of the financing 15 years 15 years 1) 15 years full 1) 15 years full repayment repayment 2) 15 year repayment + 2) 15 year repayment + bullet at the end bullet at the end VAT Refund In the construction In the construction In the operating period In the operating period period period + in the operating period Net Present Value 1) -143,1m EUR 1) -145,5m EUR 1) -204,9m EUR 1) -206,1m EUR 2) -168,1m EUR 2) -170,5m EUR 2) -207,1m EUR 2) -208,3m EUR 3) -149,6m EUR 3) -152,0m EUR (lump sum) (lump sum) 4) -173,0m EUR 4) -175,4m EUR (lump sum) (lump sum) Intermediate report for discussion purposes’ 6
High level overview of the contact arrangements on Polish market The rules of construction works contract between investor and the developer/contractor are regulated by Polish Civil Code, title XVI articles 647-658. It regulates not only the formal aspects of the contract like contract scope, formula or project subject, but also the mutual rights and obligations between the investor and the contractor including their joint and several responsibilities to subcontractors. Obligations of Investor: The investor's obligations can be divided into two main categories, depending on whether they are carried out before or after construction works or parts thereof. The first includes obligations, the implementation of which is intended to give the contractor the opportunity to proceed with the execution of construction works. The scope of these obligations results primarily from the relevant provisions specifying the activities that must be carried out by the investor before the contractor starts construction works (i.e. handover of the construction site). These obligations may be clarified, extended or limited in the works contract and these relate to, among other such activities, without which the contractor cannot perform the service. Among the obligations of the investor belonging to the second category, the first one concerns the payment of agreed remuneration, while the second one concerns the taking over the constructed facility from the contractor. Obligations of Contractor: The primary obligation of the contractor in the construction works contract is to complete the object in accordance with the design and principles of technical knowledge, and to hand over the constructed facility to the investor. The contractor's primary duty is to hand over the object specified in the contract. . Intermediate report for discussion purposes’ 7
4 General Assumptions to the Financial model Main assumptions 4.1.1 Currency of the financial model The base currency of the model is EUR. CAPEX assumptions are expressed in EUR. OPEX assumptions are customarily incurred in PLN and as such these costs are input to the model in PLN. Throughout the model an exchange rate EUR/PLN of 4,26 is applied in the operating period. The exchange rate is based on the 5 year forecast prepared by The Economist Intelligence Unit. 4.1.2 Timeline of the financial model The timeline of the project is set at 18 years and is divided into 2 phases: a. Construction Phase (Q1 2022 to Q4 2024): during that phase all construction costs are incurred. This stage is presented in the model in a quarterly time interval. b. Operating phase (2025-2039). Operating period starts in 2025 and lasts for 15 years. This stage is presented in the model in an annual time interval. 4.1.3 Capital Expenditure PwC has divided the CAPEX into two categories: a. Initial CAPEX – construction costs amounting to 140m EUR in nominal terms (when paid according to milestones). It is based on the small sample of construction costs for standard A-Class office buildings in Warsaw and major Polish cities which ranges from 1600 EUR / per sqm to over 2000 EUR. Taking into account the total GLA of the building, its characteristics (height, parking etc) and location PwC assumes the construction costs to be in the range of 1800 EUR – 2000 EUR per 1 sqm of Gross Leasable Area for the Frontex HQ building. For the purpose of our financial model we assumed a level of 2000 EUR per 1 sqm as a construction cost (hard costs + fit out) for the HQ Building due to expected high quality and safety standards. Please note that our estimation of Initial Costs is based on high level information that Frontex provided to us and final construction costs may differ. More accurate investment budget can only be established on the basis of the architectural design, taking into account inter alia technical, environmental and safety solutions of the building. Intermediate report for discussion purposes’ 8
In order to estimate the level of Initial Capex, PwC performed analysis of construction budgets of standard office buildings on the Polish market developed during the last 5 years. The table below contains hard costs and fit out costs for each building. Category Project 1 Project 2 Project 3 Project 4 Project 5 Project 6 Project 7 Location Warsaw Warsaw Warsaw Warsaw Katowice Kraków Kraków Size Large Medium Large Large Medium Medium Small Number of floors 20 10 20 10 10 10 10 above ground 20 20 20 Number 5 2 5 2 3 2 1 underground levels Date of completion In progress In progress 2016 2016 In progress 2020 2018 Net Construction 1900 1 460 1250 1650 1050 1000 1150 cost (EUR per sqm) Net Fit out cost 600 525 450 425 450 400 (EUR per sqm) Net Hard costs 2500 1 985 1700 1650 1475 1450 1550 (EUR per sqm) Source: PwC database PwC decided to use the upper limit of the provided range in our calculations due to the expected high technical standard of the building, high sustainability of the building including BREEAM or LEED certificates (at least Excellent for BREEAM or Gold for LEED) and 2 level underground parking for 1,200 cars, all of which will increase the initial construction costs. Note: Project 1, which is currently being prepared, will be over 4 times higher than the Frontex HQ, which brings up significantly the construction costs. In case the initial CAPEX was paid as a lump sum in Q4 2024, the contractor would require Frontex to pay 159m EUR instead of 140m EUR - due to time value of money and their required rate of return (7,3% WACC). b. Maintenance CAPEX - The maintenance CAPEX includes investment expenses related to maintenance of the building substance, including renovation, modernization and expansion of systems and installation, or adaptation of the building to new regulations. ● Maintenance works of facade and general warranty review of windows every 5 years ● Every 3 years cleaning of the HVAC ducts, after 15th year upgrade of A/C units (1,8m EUR) ● Every 10 years replacement of the sprinkler heads Intermediate report for discussion purposes’ 9
