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