A dearth of greenfield infrastructure opportunities combined with unsupportive governments have burst the public-private partnership bubble in western Europe, with deal flow decreasing dramatically from its peak in 2007. Stefanie Linhardt reports on whether this trend will prove to be terminal.

PPPs reach a road block

Public-private partnerships (PPPs) are waning in western Europe. Before the 2008 global financial crisis, the use of partnerships between the government and private investors to finance infrastructure were growing, but the market has since seen a decline. Governments went into austerity mode, neglecting PPP plans. But with an abundance of financing opportunities available, where could new deal flow come from and what are the challenges?

A growing market in the first few years of the 21st century saw European PPP volumes rise from some €15bn in 2000 to highs of near €30bn in 2007. Some €188bn of deals closed between 2000 and 2008, according to data from the European Investment Bank (EIB).

However, in the aftermath of the global financial crisis, Europe’s PPP deal flow dwindled: 2012 saw deal volumes of less than €15bn, while in 2014 – the year with the highest number of deals closed since the crisis – volumes stood at €19bn, according to the EIB. And even though 2015 data is not yet available, the half-year market update by the EIB’s PPP Expertise Centre showed that the first six months of 2015 saw just half of the deal flow of the same period in 2014. What are the reasons?

Empty promises

“During the crisis years, the governments weren’t necessarily initiating projects because of the pressure on national budgets,” says Charles Greenfield, Société Générale’s head of UK infrastructure project finance. “Because programmes weren’t initiated four or five years ago, and the gestation period of PPPs is quite long, there aren’t very many projects coming through now.”

Alistair Higgins, director and head of structured bonds, infrastructure, at ING Bank believes that the slowdown is related to a lack of delivery on the procurement side by governments.

“Governments are saying ‘we are going to invest in infrastructure’ but when it comes to it, the process is slowed down by execution,” he says. “Since 2008, the pipelines have been going down with one of the few exceptions being the Dutch market. In the French, Spanish and UK markets, greenfield PPP procurement has taken a big hit.”

The Netherlands dominated new PPP issuance in 2015, adds Mr Greenfield, who still expects to see potential PPP opportunities in Germany and Norway in 2016, alongside some more Dutch projects. But few deals in the infrastructure space in 2016 are likely to be new or ‘greenfield’ opportunities – making competition for financing these deals even hotter.

“The financing terms available are very, very good – comparable to what we saw in the market leading up to the crisis,” he says. “If anything, markets are even more liquid because borrowers now have a much wider choice of financing solutions available to them.”

Strong competition

Competition for new PPP infrastructure deals is strong, but as those deals are becoming increasingly rare, bankers are more likely to be dealing with acquisition financings as well as refinancings.

“There were a number of deals, which closed during the crisis years, where funding costs were much higher [than they are today],” says Mr Greenfield. “A lot of those deals had features that impact dividend flows to shareholders, so there is a spate of refinancings happening at the moment.”

As is evident across capital markets, the low-interest-rate environment is making for some attractive opportunities for borrowers, as commercial banks are chasing deals, while the project bond market and institutional investors are also looking for yield – in fixed- and floating-rate loan formats. That, coupled with quasi-sovereigns such as the EIB looking at subscribing to larger shares of the financings and public bond markets, which are becoming increasingly accessible, is seeing the money chasing the borrowers.

With deals so sparse and competition between commercial banks so fierce, institutional investors have widely been crowded out of PPP financing during the course of the past year, a fact that concerns Mr Higgins.

“We are seeing very limited uptake by the institutional market to fund greenfield construction needs, where in the medium to longer term these investors really are essential because banks are not the best homes for funding long-dated infrastructure projects,” he says.

More guarantees, more deals?

As availability of financing does not seem to have a significant impact on PPP deal flow today, could government – or quasi-government – guarantees help create more projects? 

The ‘Investment Plan for Europe’ announced by the new European Commission, headed by Jean-Claude Juncker in 2015, promised exactly that: additional EU guarantees that bring with them large sums of investment.

The ‘Juncker Plan’, as it is also dubbed, will inject €16bn of EU guarantees into the European Fund for Strategic Investments (EFSI) alongside a further €5bn from the EIB. These funds will act as risk guarantees to encourage further public and private sector investment, which is expected to reach total additional investment capacity of €315bn by 2017, according to the European Commission.

In 2015, the EIB provided €7.5bn under the EFSI, which supported total investment of more than €50bn, some €19bn of which was for strategic infrastructure, such as new or upgraded hospitals, schools, universities, social housing, ports, roads and railways, as well as essential investment in water, energy and communications infrastructure, according to the EIB. Yet, how much of this came in the form of PPPs is not clear.

“The Juncker Plan grabs headlines in terms of the amounts involved, but if you look into the detail, it doesn’t seem to include a tremendous amount of privately financed infrastructure coming to market as a result,” says Mr Greenfield. “The bulk of what is branded as Juncker Plan initiative is going to be publicly funded.”

He adds that EIB financing, however, could take a bigger share in financings going forward.

Quality matters

Yet, in the midst of the talk about the need for further deals, there are lessons that not all deals are necessarily good ones, and that projects need to be realistic.

Portugal provides one such example. In the early 2000s, the government was looking to tender PPPs to build 30 motorways – despite critics arguing that this represented far too many given the country’s relatively small size. Out of the original programme of 30, 11 were tendered and seven were built. Some of the motorways that were built have had 70% less traffic than initially estimated, causing big sustainability issues, according to sources. The average cost/coverage ratios of tolls in these PPPs is about 30%.

The overestimates were, it would seem, the product of over-enthusiasm for PPP opportunities, possibly created by the misbelief that because of the involvement of the EIB and private sector, the government was not creating any additional debt liabilities.

Having identified the mistakes that were made, in 2012, new PPP legislation was enacted in the country. The government also established the Unidade Técnica de Acompanhamento de Projetos (UTAP), to deal with PPPs for the ministry of finance and keep know-how within the government domain rather than outsourcing the procurement process to consultants.

UTAP works on the basic structuring of a project, the cost/benefit analysis, financial viability and fiscal sustainability. Then, if there is value for money for a PPP versus traditional tendering, UTAP launches the PPP tender and takes care of the procedures, including the evaluation of bidders. When a contract is signed, UTAP steps aside and the line ministry takes over the contract management of the PPP.

In October 2015, the Portuguese government said it expected to launch four PPPs in 2016: two hospitals and two motorways. Since then, however, the conservative minority government formed after the general elections in early October 2015 was toppled and the new government under prime minister Antonio Costa has yet to disclose its strategy concerning public investment – a reminder of how integral the government policy is to PPPs.

Realistic about revenue

Elsewhere, the Arlanda Express, an express train that links Stockholm city centre with the city's Arlanda Airport, highlights how, even when a project is thoroughly researched, new factors can still arise and interfere with a project.

“The Arlanda Express was constructed on the basis of a carefully calculated analysis of several factors, including the curbing of greenhouse gases in the entire precinct, reducing bus and car traffic and, indeed, the socio-economic benefits of expanded train services,” says Oshani Perera, director of public procurement and infrastructure finance at the International Institute for Sustainable Development. Ms Perera advises governments to make sure that their assets are sustainable and affordable in the long term.

However, when the train service began operating at the end of 1999, Arlanda Express recorded lower than predicted passenger numbers, according to Ms Perera.

“There were many reasons for this – from external factors such as the economic downturn in 2000, the 9/11 terrorist attacks, the IT sector crash in 2002, but more worryingly, more direct decisions such as the construction of three new airports in direct competition to Arlanda and the upgrading of motorways between Arlanda and Stockholm along with affordable parking facilities at Arlanda [had an effect on passenger numbers],” she says.

The motorway extension means that a bus journey is about half the price of the train and, during off-peak times, takes only about 20 minutes longer.

“Similar examples are scattered all across Europe and the world,” says Ms Perera. “Moving forward, it is critical that infrastructure projects are developed to be more bankable in the longer term. To enable this, the more accurate estimation of future revenues streams is key.

“Most governments have little hold on what they are planning over the next two years – so it can be very difficult to know how revenues streams and the willingness and ability to pay for future assets can change in the medium term, making the structuring of bankable PPPs all the more tricky.” 

A reliable PPP producer

What attracts investors is a reliable PPP originator – a country that sets out its pipeline, its dates and where, with very few exceptions, the procurement happens on time, with the same process and investors know that conditions under which the borrower can prepay debt will also be the same in every issue, according to Mr Higgins.

“An example of that is the Netherlands,” he says. “Investors know they don’t need to reinvent the wheel every time and that once they have participated in one Dutch PPP, three times a year there will be another one from the same government authority and with the same tender process.” 

The Netherlands arranges between two and three deals a year – mainly roads – and has a "good pipeline", which should see it close the same number of deals a year for the foreseeable future, according to Mr Greenfield. In 2016, he expects four deals with capital expenditure of between €500m and €700m to be launched in the country.

“In the Netherlands, there is a fairly efficient and streamlined process in terms of pre-qualifying tenderers, getting bids in, awarding projects, getting them closed, and there is a strong commitment too, once the projects are initiated as PPP projects, they tend to be closed in 12, at the most 18 months, and there is very little risk that the process might be derailed in between,” he says.

Deals need to be well structured, necessary, affordable, and have a stable revenue stream or payments that are forecast on real market conditions and demand, according to Ms Perera. “No amount of credit enhancement would alter a badly structured deal for a government that is unable to negotiate a deal,” she says. “Credit enhancement works to bridge the gap of a good deal that is just missing the mark on being bankable.”

So, governments will have to take a deep look at their PPP strategies and perhaps take a leaf out of the Dutch book to succeed with more such projects.


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