Since the end of 2006, the Portuguese government has announced several public-private partnerships (PPPs) to be launched in the next few years. The government initially argued that this new wave of investment was a response to an appeal from construction companies – which had a lot of capacity, such as equipment and workforce, not being used – and to boost the country’s stagnant job market.
But a more powerful argument emerged with the global financial crisis and economic slowdown, as all Europe’s countries gathered at a pan-EU summit and committed to boosting public investment at home.
The most relevant investment in Portugal is in the infrastructure sector. These include: a new airport for the capital, Lisbon; a high-speed rail link; a fresh road programme (Novas Estradas de Portugal or ‘New Roads of Portugal’); and several new hospitals, which are out for tender. It is an ambitious investment programme, which is keeping the entire project finance community busy.
Infrastructure plans
The new Lisbon airport has already been subject to much debate, particularly with regard to the location of the site, which will replace the current airport. Ota, on the northern side of the Tagus river, was initially the preferred location. However, following lobbying by several groups, who presented a variety of studies that came to different conclusions, the location was changed to Alcochete, on the southern side. The change of location means that feasibility studies must be carried out again, and so a delay in the bidding process seems inevitable. In addition, the lack of information on the final financing model is slowing the process somewhat, so it is likely to be late 2009 or even 2010 before the project starts. Investment is expected to be about €3bn ($4.3bn).
In the roads sector, following the success of the first road programme, the Novas Estradas de Portugal, is under tender. The main goals of this project are to link the poorest interior regions to the coast and to the largest and richest regions, and to provide alternatives to some of the most congested roads. It comprises eight projects, of which four have already been awarded to various companies:
-- Transmontana – Soares da Costa/FCC Group;
-- Douro Interior – Mota-led Group;
-- Baixo Alentejo – Edifer/ACS Dragados Group; and
-- Baixo Tejo – Brisa-led Group.
The other four are out for tender, for an expected capital expenditure of about €3.3bn. There have been suggestions that another eight roads will be put out to tender after the first projects, but there has been no official confirmation. The European Investment Bank (EIB) has supported the Transmontana project and will support the Baixo Alentejo project, and its participation is considered crucial to reaching the financial close under the severe market conditions.
The new series of programmes includes a very important change to the initial one: the Portuguese state is no longer the direct grantor but has been replaced by Estradas de Portugal, a limited liability company that is fully owned by the state. It will aggregate all projects as sub-concessions of a master concession agreement, granted for 75 years. Sub-concessions are granted for 30 years, so the future economic value of Estradas de Portugal is predictable because the company will be entitled to all of the revenues coming from existing and future concessions after that.
So far, because of this certainty and the revenues that are immediately endorsed to Estradas de Portugal by the government (via the passing-on of a percentage of the tax on oil products, called Imposto sobre Produtos Petrolíferos) it has been possible to fund the tenders that reached the final stage, despite the fact that no international credit rating has yet been given to the new grantor. The market seems to rely on Portugal’s past and present capability to deliver a sound and stable environment for project finance deals to close, and it is expected that this rationale will prevail despite the difficulties.
The first bidding process for one stretch of the new high-speed rail link (Poceirão to Caia) was launched in 2008 and bids were put forward on October 2. Four consortiums presented proposals, but for the best and final offer stage, two have been confirmed: the Brisa/Soares da Costa-led group and the Mota-led consortium. The process will comprise six projects: five infrastructure PPPs and an additional one for road signage.
The aim is to connect Lisbon to Oporto, Lisbon to Madrid and Porto to Vigo by high-speed rail and to the trans-European high-speed rail network. Global capital expenditure is expected to be about €8.5bn. Again, EIB support is crucial in this project, together with EU funds, as commercial debt is expected to represent only a small portion of the total investment effort. In addition, a risk matrix seems to help, so a number of potential market participants are looking with interest at this project.
Health sector
Finally, Portugal is also investing in more hospitals. After the government conducted an evaluation of the first wave of health projects, it concluded there was a great deal of complexity in the clinical process, which led to a long negotiation process. Subsequent delays undermined the whole purpose of the programme. The first wave departed from the classic approach to such projects by splitting each health scheme into two areas: the infrastructure and the clinical process. However, four years after launching, only two projects out of the 10 announced have reached financial closure (Cascais and Braga hospitals) and three more are still at the tender process.
Because of this experience, the second wave of hospitals will apply the classic infrastructure approach and a simpler qualification method will be used to select three bidders for each project. The National Healthcare Service will develop the clinical part without the involvement of private entities in the tender. The goal seems clear: to make far more headway in much less time. The expected investment is about €1.4bn for the entire programme and already two new hospitals – Todos-os-Santos in Lisbon and the Algarve Hospital – have entered the tender process.
This series of concurrent projects comprises an expected total capital expenditure of about €16.2bn, to be executed in four years. This would be an ambitious goal in a normal economic and financial environment but in the turmoil that global markets are experiencing, this will not be an easy task. Lending conditions will, no doubt, be worse than initially expected and this will put additional pressure on all market participants.
The new deals, together with the PPPs awarded since the 1990s, imply a strong budget commitment from the Portuguese state and, therefore, the need to rebalance all PPPs towards the financial capacity of the Portuguese budget.
Part of this rebalancing can be achieved by collecting tolls from the shadow toll concessions. Several studies have assessed this approach and at least three concessionaires are actively working on it. However, it implies a different project risk matrix and, therefore, banks must analyse the implications of such an alternative. Most likely, the structure will be availability payments substituting for traffic risk. But with an increase in public debt for EU countries – Portugal included – the likely market reaction is unpredictable.
The easy way to avoid endless discussions with large banking groups is simple, in theory: to refinance existing deals. A refinancing process could also be part of a solution to solve the financial rebalancing events that are pending on several PPPs, which need to occur sooner rather than later to avoid additional costs or even indemnities.
But that is where market conditions and liquidity constraints play their role. Currently, it is almost impossible to get better financial conditions than those established for the existing deals, making refinancing challenging.
The monoline market is also facing difficulties, suffering from consecutive downgrades and capital degradation. Therefore, the capital markets route is also out of the equation. Together with the possibility of refinancing existing deals is the need to raise finance for the current pipeline at a time when banking resources are extremely scarce. So far, it is unclear how much bank debt the international banking community is willing to absorb on Portuguese PPPs.
Some restrictions have already been seen, with a lot of banks committing only small amounts to each deal if their initial consortium does not reach best and final offer stage stage.
So, to write the next chapter about the Portuguese PPP market will require lenders to rise to the following two challenges: refinancing existing deals and raising additional finance for new transactions, with fewer market participants and with huge commitment. Will it be possible in the difficult market conditions? It is anybody’s guess.
This article was contributed by Caixa Banco de Investimento.
CaixaBI – Caixa – Banco de Investimento, SAStructured and Project Finance DivisionManaging director: Sérgio MonteiroE-mail: sergio.monteiro@caixabi.ptTel: +351213137300Website: www.caixabi.pt
