Between 1991 and 2000, Portugal invested more in infrastructure and other construction projects than any other EU country. As a result, the country now has more motorway in terms of distance per inhabitant than any of its European peers.
As economic growth begins to pick up after a sharp downturn, the new Socialist government envisages a further wave of big infrastructure projects. Plans include a high-speed train network, a second Lisbon airport, further motorway expansion and extensions to the Lisbon underground system.
Economists have called into question Portugal’s partiality for pouring huge amounts of money – much of it EU funds – into concrete and asphalt. Pointing to Ireland’s “economic miracle” as an example, many would prefer to see a stronger focus on education, professional skills and scientific research.
Banks are not complaining, though. In a climate of privatisations being put on hold in the hope of more buoyant markets, merger and acquisition activity dampened by a defensive mood among Portuguese companies and corporate lending hit by sluggish economic growth, project finance has become an important source of growth for the country’s investment banks.
For example, Banco Espírito Santo de Investimento (BESI), which disputes the leadership of the project finance market with Caixa-Banco de Investimento, the investment banking arm of Caixa Geral de Depósitos (CGD), almost doubled net profits in 2004 to €53.5m, with project finance accounting for 19% of its business volume.
State-owned CGD leads Portuguese banks in project finance in the Iberian peninsula, where it ranks fourth overall.
In March, BESI won a mandate as financial adviser for the construction of a 450km stretch of motorway running along the Black Sea from Sophia to Bourgas in Bulgaria, the Trakia Toll Road Motorway project. It is to be built by a group of three Portuguese and two Bulgarian construction companies that BESI helped to bring together. Last year, it won plaudits for arranging a similar deal in Hungary and has also been active in project finance in Brazil, Greece, Ireland, Spain and the UK.
“We have been investing for several years in hiring the best people and have built up a London-based team that is very strong in project and structured finance,” says Ricardo Espírito Santo Salgado, BESI group chairman. “We have been able to plug this structure into our operations in Portugal, Spain and Brazil, gaining a clear leadership position in this area.”
Domestic market buzzes
Besides overseas deals, Portugal itself is a significant market for project finance. Portuguese groups are prominent among 19 banks participating in the general syndication of a €575m project, known as the Litoral Central scheme, to build a coastal motorway in Portugal.
The deal, signed in March, is being lead arranged by the Millennium BCP group, CGD, Mizuho, Depfa and Banco Santander de Negocios Portugal. The consortium comprises Brisa-Auto Estradas de Portugal (80%), BCP Investimento (10%) and SMLN Concessões Rodoviarias de Portugal (10%), which are together providing €177m in project equity. BCP Investimento is the financial adviser.
Portugal’s motorway network stretches almost 2000km, representing an investment of about €6bn. A further 1400km-1600km is expected to be built in the next decade. More than 1500km of the existing network are operated as toll motorways run by private-sector companies that have been granted government concessions.
Plans to build a high-speed rail network, including up to four links to Spain, could involve an investment of more than €12bn in the coming decade. A consortium of Portugal’s Banco Finantia, Depfa Bank and Goldman Sachs recently won an 18-month contract to advise the government on the project.
Airport plan resurfaces
The new government is also pushing ahead with a €2.3bn plan to build a second Lisbon airport at Ota, northwest of the capital. The project had been shelved by the previous centre-right administration. Lisbon’s existing Portela airport, close to the city centre, is being expanded with €318m due to be invested in the years to 2009.
Portela is also due to be connected to the Lisbon Metro system by 2010, part of a €1.4bn investment programme that will expand the existing underground railway network from 35.6km to 59.7km and increase the number of stations from 48 to 80.
In a speech made shortly after the new government took office in March, Vítor Constáncio, governor of the Bank of Portugal, emphasised that private finance initiatives (PFIs) and public-private partnerships (PPPs) would be needed to fund these projects, given that the flow of EU funds to Portugal was diminishing and that public spending had to be restrained to comply with the EU’s growth and stability pact. Warning against the possibility of the state bearing too great a financial responsibility in such projects – one of the criticisms that has been levelled against project finance deals in Portugal – he said: “Private companies participating in public-private initiatives must sustain a genuine commercial risk based on their ability to manage costs and not be guaranteed a fixed level of profitability.”
Over the past decade, the state has focused on PFIs and PPPs as important tools to develop public infrastructure. The process began with the building of the 18km, €1bn Vasco da Gama bridge over the Tagus estuary in Lisbon, which was completed in 1998. Several road and rail projects followed before the focus shifted to the building of football stadiums for the Euro 2004 championship, which Portugal hosted. Ten hospital projects are now under way as design-build-finance-and-operate (DBFO) PPPs.
In 2003, a “PPP law”, which applies to existing and future projects, was approved. It defines a PPP as a contract in which a private entity agrees with a public entity to develop a long-term activity and cater to a public need, where financing and operation are partially or totally the responsibility of the private entity.
Privatisation wanes
While project finance deals are on the rise, privatisation, which was once the mainstay of investment banking in Portugal, has waned. This reflects both market conditions and the lack of companies that remain to be privatised. TAP-Air Portugal, the national carrier, is one of the few companies that may come up for sale in 2006. Following the privatisation of the airline’s ground services division, the government is thought to be considering the possibility of selling off the maintenance division or possibly a stake in the whole group.
The biggest privatisation deal planned for 2004 fell through. After an auction, the centre-right government then in office agreed to sell the oil business of Galp Energia, the country’s dominant oil and gas utility, to Petrocer, a Portuguese investment vehicle for brewers Unicer and Banco BPI. The operation collapsed after the European Commission vetoed the acquisition of the gas side of the business to Energias de Portugal, the main electricity group, on competition grounds. The new government is now mapping out an alternative strategy for the energy sector.
A number of large US and European private equity groups expressed disappointment with the auction of the 41% in Galp Energia and the earlier privatisation of Portucel, Portugal’s leading pulp and paper producer, because local groups won both deals.
But Portuguese analysts say that the implied criticism that Portugal has been reluctant to open up its state-owned businesses to foreign shareholders does not tally with the country’s record of large-scale privatisations. Portugal has run one of the most extensive sell-off programmes in Europe, in which foreign investors have played an ample role. In the banking sector, for example, Spain’s Santander has a market share in Portugal that is similar to its share of the Spanish market.
Cross-border M&A
The increasing integration of the Spanish and Portuguese economies is the main focus for M&A activity. “This is an area where business is clearly going to grow,” says António Guerreiro, chairman and chief executive of Banco Finantia, an independent investment bank. “The trend towards globalisation and integration will lead to more cross-border M&A deals for Portuguese banks, not only between Portugal and Spain but also on a wider international scale. Ownership transitions in family-owned and other Portuguese companies should also generate new business.”
Santander Totta believes it has a clear advantage in cross-border business between Portugal and Spain. “Because we have a deeper knowledge of acquisition targets in Spain, we can measure the risk involved and reach a decision on finance faster than our competitors when a Portuguese group wants to buy a Spanish company,” says Miguel Bragança, the group’s chief financial officer.
Santander Totta also benefits from the Santander group’s big balance sheet, enabling it to finance large-scale deals quickly, says Luís Bento dos Santos, a Santander Totta board member. As a result of this capacity, he says, the bank has been involved in about one-third of all the big cross-border corporate deals between Portugal and Spain in the past five years, well above its natural market share of 11%.
Portuguese banks are jockeying for position in middle-market corporate lending ahead of a forecast pick-up in demand as economic growth slowly recovers. Lending to non-financial companies has fallen from a peak of more than 20% a year in 2000 to less than 3% but is now showing signs of a slight upturn.
“There is little scope for growth in lending to the really big corporations,” says Paulo Teixeira Pinto, chief executive of Millennium BCP. “That market is small, margins are low and issues of concentration of risk soon arise. The real competition is for small and medium-sized companies.”
Market strategies
In a bid to win a bigger share of that business, banks are rolling out a range of marketing and operational strategies. Millennium BCP has launched an aggressive campaign, offering corporate credit at highly competitive rates. Banco Espírito Santo, which has the strongest franchise among middle-market corporations, is investing in more personalised services and targeting individual small-business segments including pharmacies, franchise outlets and notaries.
CGD, which leads the big corporate market, is creating a specialised corporate branch network from existing branches to meet the specific needs of smaller companies. João Freixa, CGD vice-president, says: “Many of these branches were sales support areas for companies. Now they will be fully equipped to deal operationally with corporate customers. This will help us to make faster decisions on lending and increase our level of service.”
The group is also improving the quality of its risk assessment methodologies and putting rating systems in place to assess the quality of corporate lending. “It’s important for us to grow the volume of our business in this area, but it is equally important to maintain the quality of our risk portfolio,” says Mr Freixa.
“An opportunity exists to increase our share of the middle-market corporate sector. Our strategy for achieving that is to put a structure in place that is more pro-active with customers and closer to their decision-making processes.”
