Opinion of CEE PPP potential among lenders is divided. Some banks remain bullish about the region – others see PPP in Europe's accession states as the triumph of hope over expectation. Either way, the problem for sponsors and lenders alike is the scale and limited spread of projects.

To make investing resources in developing PPP in CEE worthwhile, not only does the project pipeline need to pick up, but the projects need to be Eu100 million-plus in volume. This restricts lenders to jurisdictions like Hungary, Poland the Czech Republic and Slovakia.

And with no political will in Poland for further PPP schemes using government funds (Poland's priority is the maximum absorption of EU funds which require co-financing from the national budget. This reduces the already limited public sector resources for participation in PPPs: for more details search 'PPP+Poland+ backburner' on www.projectfinancemagazine.com), and jurisdictions like Hungary and Slovakia in election year, projected CEE deal flows for 2006 are expected to be thin.

The total allocation of EU cohesion and structural funds for all New Member States, will double from around Eu24 million per annum to Eu48 million per annum from 2007 to 2013, and Poland will continue to be the largest recipient.

Nevertheless, certain industry experts believe that despite EU funding, Europe's New Member States will have no option but to turn to PPP. "In the end these governments will have to deliver infrastructure, and they don't have much headroom in their borrowing requirements to fund the need themselves. Eurostat has been very helpful in terms of off-balance sheet treatment of PPPs. As long as that continues, there will be an active market for infrastructure," says Kent Rowey, partner, project finance, at Freshfields Bruckhaus Deringer.

Hungary goes to bond market

In recent years, Hungary has demonstrated the ability to close groundbreaking transactions as evidenced by the M5 and M6 motorway projects.

But with elections looming in April, Hungary's PPP plans are currently on hold. Furthermore, in June 2005, the PPP secretariat was closed down, leaving its activities in the hands of the property management department of the ministry of economy and transport. It is rumoured that the department now has jurisdiction over only a handful of transport projects.

Post election the market is expected to pick up. Western banks and sponsors are eagerly awaiting the next phase of the M6 motorway and a major bond issue to back infrastructure development. The competition for the former is certain to be high, with no premium expected for country risk.

In June 2005, Citibank and Deutsche Bank won the mandate to oversee a Eu3-billion bond issue for Hungary's State Motorway Management Co. Ltd. (AAK) to fund further transport infrastructure programmes. However, the deal had to be scaled back to HUF500 billion (Eu2 billion) last autumn, after Eurostat ruling the deal could not be off-balance sheet.

In late January, the bond issue was approved by parliament. The proceeds from the issue will fund new infrastructure projects as well as those projects that were not 50% complete by the end of last year. The one-tranche deal is expected to hit the market by the spring.

The M6 motorway refinancing is also pulling in a lot of bank interest. Sponsors Bilfinger Berger and Porr are in the market with a Eu411 million bond issue, to be wrapped by FSA. Dexia is bond provider while BNP Paribas (also financial advisor to the sponsors) is expected to complete the swap.

According to one regional expert, "Margins are coming down and the M6 deal will come to the bond market very cheaply."

Nevertheless, the deal is a good sign of growing innovation in CEE PPP.

Slovakia goes private

Slovakia has come to the market for the first time with two airport privatisations – Bratislava International Airport and the regional airport at Kosice – and its first road PPP.

The 90-kilometre D1 motorway project, from Bratislava to the Polish border, is expected to be tendered in five tranches, each in the region of Eu400 million. Responses to the RFP for the first section – 30km of motorway from Lietavske Lucky to Turany – are in and a shortlist is expected in the coming months.

Like the well documented Budapest Airport privatisation in Hungary won by BAA, the airport deals have suffered a number of hurdles and are still the focus of heated political debate.

In December, an Austrian consortium, TwoOne, consisting of Vienna International Airport, Raiffeisen Zentralbank and Penta, secured the 66% share. However, following political opposition and challenges from one of the unsuccessful bidders, the selection commission asked the two most successful bidders to resubmit bids. The Independent Slovak Airport Partners (ISAP) consortium, led by Köln/Bonn Airport, maintained that it had submitted a higher bid than the TwoOne consortium, and lodged a formal complaint with the relevant ministries.

In late January, TwoOne and the Abertis consortium (consisting of Abertis, TBI and the J&T financial group) submitted revised bids. TwoOne came out the eventual winner with a supplementary Sk4.5 billion (Eu121 billion) bid on top of its original Sk6 billion (Eu159 million) offering.

Like the opposition to the airport deal in Hungary, in early January, Slovakia's strongest opposition party, Smer, stated that it would overturn the sales if it accedes to power in the September elections. It is typical of deals in the region where the politics of PPP leave lenders uncomfortable.

Not everyone believes that these threats will be carried out. According to Dr Otto Wächter, partner at Graf, Maxl & Pitkowitz in Vienna, "This fear that governments will overturn projects is misguided. Before an election a lot of things are said which do not transpire after an election. In addition, the power of the EU should not be underestimated."

Politicking

But politics and logic are not always bedfellows: for example the D47 debacle has left many bankers and sponsors reluctant to even consider PPP deals in the Czech Republic.

In 2003, the Czech government pulled out of what would have been a Eu1.5 billion deal at the eleventh hour. The project was the country's first privately financed shadow toll, and would have been especially significant given its lack of EIB funding. Deutsche was mandated as adviser, with Abbey National, BES, Commerzbank and WestLB arranging the debt and the bond issue, split in two halves of Eu850 million ($853 million).

The project, inherited from the previous government, had been awarded to a consortium led by Israeli Housing and Construction Association without a proper tender process. Inexperience on the part of the state in PPP led to allegations of impropriety as well as mispricing. Moreover, the financial implications of the deal had not been adequately assessed, which, in turn, led to speculation about value for money. Though the government could not be faulted in sticking to its principles in shelving the deal, it had inadvertently lost the goodwill of the lending community.
Nevertheless, three years on attitudes seem to have changed. A handful high profile deals may provide the boost needed for what has been a beleaguered market.

The largest project expected to come out of the country in the next year will be the upgrade of the Prague-Kladno railway line and construction of a railway connection to Ruzyne Airport, known as AirCon (Airport Connection). According to PPP Centrum (a joint stock company formed by government decree that reports to the Ministry of Finance), the total investment costs are expected to be in the region of CZK15-18 billion (Eu465-560 million). The project will be structured as either a BOT or DBFO, with a 30- to 40-year licence contract for operation of traffic, with demand risk being shared with the Procuring Public Authority. The government is expected to pick up some 10% in participation costs.

Although it is too early to say whether the project will adhere to the government's proposed timetable, advisers are expected to be selected by the spring, while revisions will be finalised by the end of the second quarter.

A further major project is for two sections of the D3 motorway, a 30-kilometre stretch that runs from Tabor to Bosilec. The BOT project is currently at inception phase, having been approved by the government, and is expected to mandate advisers later on this year. Investment costs should come in at round the CZK11 billion (Eu367 million) mark. The contract term is for 30 years, with a proposed six-year construction period.

Although these two projects are certain to grab the attention of the wider funding community, the Czech Republic is also coming to market with a host of accommodation projects. These deals are small in size – CZK500 million-1 billion – and will most likely be picked up by local banks and the lesser Austrian houses. Nevertheless, they may prove the added catalyst to what has been hitherto a somewhat disappointing jurisdiction.

PPP-less Poland

Having gained itself a reputation for not bringing PPP deals to market, Poland continues to disappoint. Apart from its first major PPP project – the Eu840 million A2 motorway – in 2000, only one sizeable project has closed.

In late July 2005, Gdansk Transport Company – a special purpose company comprising Eu35 million in combined equity from Skanska BOT (30%), Laing Roads (29.6%), Intertoll (15%) and Polish property developer NDI (25.4%) – signed a Eu640 million ($800 million) 30-year multilateral debt backing construction of phase 1 of the A1 motorway.

The project comprises two phases: Phase 1 is a 90-kilometre new road from Gdansk to Nowe Marzy in Northern Poland, with a planned 60 km extension to the city of Torun. Construction of phase 1 is scheduled for completion in 2008. The concession period extends for 34 years to 2039.

Financing for the project comprises Eu500 million of EIB debt and Eu140 million from the Nordic Investment Bank – both priced close to Euribor. The project took a long time to close – the concession was originally announced in 1995, but stalled in 2000 because of doubts as to its financial viability.

On the back of the A1 project, two other PPPs were meant to hit the market before the end of 2005: the A1 south project and an extension to the A2. RFPs were expected to be called in by November, but nothing seems to have happened. A number of other PPP-structured projects have also been mooted. These include two lines for Warsaw Metro, which have been given a completion deadline of 2014, further motorway deals as well as prison accommodation projects.

However, in light of last year's parliamentary elections, regional experts are sceptical of any PPPs coming to market before the end of the year. The two centre-right parties (the Law and Justice (PiS) and Citizens Platform (PO)), both of which swept to victory in September, have put paid to the previous government's good work by freezing PPPs.

Paradoxically, the legal framework in Poland – which hitherto has been based on concessions without any real regulation – took a step in the right direction last year. In July, the Polish parliament passed legislation on PPPs, which came into force in October. This legislation offers guidance, rather than a strict directive, on a number of issues that the outgoing government believed would have boosted the sector, including: value for money, risk allocation, procurement procedures and public sector analysis. It was expected that further legislation, relating to public spending as well as on and off balance sheet issues, might have been engendered.

Nevertheless, there is optimism in certain quarters that PPPs will eventually get done. "The present government is essentially paying political lip service by not doing PPPs; but what the government says and what it eventually does may be two different things. You must remember that Poland needs the infrastructure and can't borrow, so it will need to find an adequate source," says a regional expert.

Given decades of underinvestment, Poland may not have any choice but to go down the PPP route. But, in the meantime, lenders will have to wait.