The Portuguese project sector is moving again – albeit with delays. Under pressure to deliver on public sector works to an increasingly impatient electorate, and with a large public sector deficit firmly breaching the Maastricht Treaty criteria, the government is putting in place a more effective legal framework and looking to dramatically shorten the time and cost involved in its PPP evaluation and tendering processes.

The moves should lead to tangible results. A number of high-profile deals – RAVE and Lisbon Airport for example – are doing the market rounds. Refinancings for some of the SCUTs (Portugal's original shadow toll programme) look set to actually appear rather than simply be discussed. And most recently, the long-awaited deadlines for financial close on the Grande Lisboa and Douro Litoral real tolls finally emerged from parastatal roads agency Instituto des Estradas de Portugal (IEP).

From late this year more projects should see the light of day. There is considerable anticipation of new sectors being opened up to PPP, and some major deals in the renewable market will also finance this year.

Portugal's shadow toll, or SCUT, programme left the credibility of PPP in tatters – SCUT payments are predicted to swallow 90% of the annual roads budget by 2007 (for more details search 'SCUT' on www.projectfinancemagazine.com).

The previous government started a PPP tidying process, and the current Socialist government is continuing this. The 2003 decree law 86 required that both the treasury and the Minister of Finance be closely involved in any decision to put out a PPP or PFI tender. Projects now have to demonstrate value for money and stand up to a public sector comparator.

The government's PPP body, Parpublica, also now acts as an advisor and sometimes participant – in effect a knowledge repository, which should speed projects along. There has been a tendency for various government ministries to appoint their own advisory teams, which has led to confusion and delays.

Furthermore, a longstanding criticism of Portugal's tendering process – that it is heavily bureaucratic and expensive for bidders – is likely to improve. The government is putting into national law various EU directives passed in 2004 relating to PPP and PFI. They were due to be made law earlier this year but have been delayed until later this year.

"The new code will make a huge difference in terms of time and cost in the bidding process," says Pedro Siza Viera, a project finance partner at Linklaters in Lisbon, "and it will make it easier for more companies to participate in the tenders." The improved legal framework and assessment phase is expected to reduce the tendering process from 18 months down to nine.

Health but when?

The early beneficiaries should be hospital and transport projects. Ten new hospitals have been on the drawing board for years, and finally at least nine of them look set to go ahead, with four at various stages of preparation.

The smaller projects, Cascais and Vila Franca will require financing of Eu50-60 million ($63-76 million). The other two, Loures and Braga, will require in the region of Eu150-160 million.

Vila Franca is due to receive bids in early June. The Loures tender, which was cancelled, is going to be re-tendered and Cascais already has a short-list of two consortiums, one led by HPP and the other by Jose Mello Saude. Braga is still in the early stages. All four projects involve clinical risk, which has proved challenging for both government and private sector to structure. Loures was cancelled because the proposals by the two final bidders had different risk profiles, making them impossible to compare.

"We are using more streamlined procedures for the hospital tenders," says Rui Sousa Monteiro, a senior economist at Parpublica. "The idea is to focus more on the output specifications and try not to go through and evaluate inputs." In other words, not to analyse the minutiae of how the sponsors will deliver the services, which creates enormous delays. Instead the focus will be to ensure bidders have the resources to deliver.

The tenders are split between infrastructure (infraco) and clinical services (clinico). Typically the first part will be a straightforward 30-year contract, which involves building and maintaining the hospital. The clinical side will be covered by a 10-year contract, because clinical demand can vary over time. To make the projects bankable the government has ring fenced the clinical services contract.

Pricing is optimistically expected to be about 100bp over Euribor, a little higher than the UK because there still needs to be some more definitions on the ring fencing and banks want to test this type of transaction before lowering margins.
Dates set for roads

In the roads sector more projects are expected, despite budget constraints. In the long term the country is moving towards real tolls – a lesson of the SCUT programme. Costs on the shadow tolls are also expected to be reduced through refinancing. From a legal point of view, the government is entitled to unilaterally modify concessions. But any modifications will involve detailed negotiation with the concessionaires.

Of the roads expected to come to market between now and 2009, only Grande Lisboa and Douro Litoral have financing dates – October 2006 and Eu150 million in debt for the former and June 2007 and Eu290 million for the latter. The IEP shortlisted Brisa and the Mota-led LusoLisboa consortium for the Grande Lisboa real toll in August 2005. The Brisa bid is supported by Millennium BCP, Caixa Geral and BPI, while LusoLisboa has backing from Banco Espirito Santo (BES), Caja Madrid, ING Mizuho and Banca OPI.

The Douro Litoral 30-year real toll road, located in the Porto area, has four bidding groups: Mota, with BES advising; Somague/Sacyr with BPI advising; and Brisa/Teixeira Duarte with Millennium BCP advising; and a Dragados/Soares da Costa team.

Industry sources expect other road projects to be announced soon, and there is debate within the government about the roads authority raising funds via a bond issue to financing the building of more roads.

RAVE delays

Portuguese light and heavy rail is also getting an upgrade. The Metro Mondego project around Coimbra looks set to go ahead. KPMG is advising on the concession structure, which will feature an infraco for 30 years and a six-year extendable operating company concession. Both concessions will initially go to the same bidder.

Although the government pitched the RAVE high speed railway links between Lisbon and Madrid and Lisbon and Porto late last year, there has been little movement. Tenders have been delayed because of a change of management and finance team at RAVE. "The finance minister has not yet received the projects so he can't call for any tenders – we are waiting for the final details, including the business case," says Monteiro at Parpublica.

The other major transport project, the new Lisbon airport, to be built some 40km from the capital, is undergoing considerable deliberation. Although the administration has proved the need for a new airport, it is yet to decide how it should be funded.

One option is to privatize ANA Aeroportos de Portugal, the state owned airports operator, and let it decide how to finance and build the new airport. Another approach would be to use a PPP concession to bring in the private sector. No decisions are expected before the summer on what is likely to be a Eu3 billion project.

Wind still solid

The renewable energy market continues to supply Portuguese lenders with a steady deal flow. Due diligence has started on the 200MW Val Minho project being contested by Endesa and EDF.

Financing for the Eu200 million deal is expected to be closed around the third quarter. Pricing is put at 100bp over Euribor in construction and 120bp during operation. Tenor is 15.5 years. The equity-to-debt ratio is 10/90, compared to the usual 15/85 in Portugal. Access to the national grid and prices are guaranteed.

The winning bidder for the 1500MW of licences tendered last year should also be out this summer. The bidders include: Enercon with EDP, Generg and Endesa, via TP and Finerge and backed by Millennium BCP; Galp with REpower and Enersis (now owned by Babcock & Brown); Iberdrola and Gamesa; and a group led by Enel. The winning consortium will also have to build a factory to manufacture the wind turbines. The project is expected to be worth around Eu1 billion and should be operational from 2008 onwards. The factory is likely to be financed separately.

The Portuguese solar market has also experienced a significant deal. Powerlight and Catavento have closed financing for the world's largest solar photovoltaic power project in Sepra. GE is providing funding for the $75 million facility through a mixture of debt and equity, and will also own the project, but has not provided details of the split. Powerlight will operate and maintain the plant, and Catavento, a Portugese renewable company that has been developing the project, will be providing management services.

Margins tightening

Because Portuguese deal flow has been largely limited to the wind sector for the past few years, sponsors have been able to squeeze banks to get the best deal. Pricing, still not on a par with Spain, is becoming more aggressive, the beneficiary of competition among local banks and the entry of several new banks into the market, particularly from Spain over the past 12 months. Tenors have tended to be shorter at 15-16 years and pricing higher, at around 105-115bp. However, with more banks and more competition, Portuguese tenors are likely to lengthen and pricing tighten up further.

If Portugal can get its mothballed PPP market sparking again – and it looks like it will to some extent – other sectors look set to open up, including government office buildings and even prisons. The government is also considering the use of some sort of PPP leasing scheme.

There is speculation that the Municipality of Lisbon may use PPP to renew primary schools, many of which need replacing or upgrading. Although that particular deal would not be large, bankers see great potential if it catches on, especially if it is replicated by other municipalities – many of the country's schools were built in the 1980s.