When the new Eu25 billion ($30 billion) 2005-2009 Portuguese infrastructure investment programme – Programa de Investimentos en Infrastructuras Prioritarias (PIIP) – was announced in June it was the first sign that the political stasis that has afflicted the Portuguese public-private-partnership (PPP) market, along with the economy, for the past four years is over.

Portugal needs PPP – no argument – if it wants the infrastructure to fuel much-needed economic growth. In August the EU gave Portugal three years to cut its deficit – which stands at 6.2% of GDP, more than double the 3% limit imposed by the EU's Stability and Growth Pact – and six months to come up with measures that would cut the deficit by the equivalent of 1.5% of GDP in 2006 and by a further 0.75% in 2007 and 2008.

The socialist government of Jose Socrates has responded with a budget for 2006 that slashes state spending next year (over 50% of the PIIP plan is expected to come from the private sector) by around Eu2 billion and will, if all goes to plan, trim the public deficit down to 4.8% of GDP in 2006.

But the new urgency in the Portuguese approach to PPP goes deeper than the PIIP and fiscal reform – there is a fundamental change in methodology brewing in government.

A change in PPP methodology

Significantly, the Portuguese government is looking at ways to reform the PPP tendering process and has made a commitment to shorten the period from request for proposals (RFP) to awarding – on average 2.5 years at the moment – by 30% to 1.5 years. Even more radical, the longstanding best and first offer (BAFO) process, whereby bidders make their best and final offers, and then wait, sometimes more than a year – for the tender to be awarded, may be changed to something like the Spanish system whereby the tender is awarded prior to financial close.

Any improvement, however small, in the speed of the tendering process is good news for project lenders and sponsors. Three changes of government in three years had left Portugal in a cycle of annual re-examination and redefinition of investment plans – and no action (for past reports search 'Portugal'). The hospital plan, for example, was enacted in August 2002 by Decree Law 185/2002 for the development of 10 new and upgraded hospitals at a total value of Eu1.5 billion. But it has yet to deliver a single deal closure.

Action not plans

By March 2006 the socialist government of Jose Socrates will have been in power for one year and its re-examination honeymoon will be over. Although nothing has yet emerged in the form of concrete project tenders, the first signs that action will follow are in place.

In the last month alone the government has relaunched the Lisbon Airport project, held a workshop with banks and sponsors over whether to adopt a UK-style approach to healthcare PPP and drop the Clinico structure from future health PPP concessions, and, as Project Finance went to press, the Madrid-Lisbon-Porto RAVE high speed rail deal is being presented to the market on 13 December.

The relaunch of the longstanding Eu3.5 billion Lisbon Airport project was first announced with the PIIP plan in June, and was initially met with scepticism in banking circles.

However, and for the first time, last month the government, advised by BPI and Banco Efisa, answered a number of questions that have dogged the project since its inception 10 years ago – most significantly that even with expansion the existing airport at Portela will not be able to handle an expected rise in traffic to over 20 million passengers a year by 2020; that with a new departure fee and 10% state subsidy the planned new airport at Ota is economically viable; and finally that the adaptation of existing military airports near Lisbon would not overcome the airspace problem.

Questions still remain over Lisbon Airport – notably over the cost and speed of the transport links between the capital and the new airport, which will be 50km from Lisbon. But consensus among local bankers is that the government has made a convincing economic case for Ota and that the project will finally go ahead.

What roads?

The PIIP plan also has ambitious statements on future road investment and does not include SCUT payments, which are designated operating expenses on the state budget. The Secretary of State for Public Works has announced 550km of newbuild roads in the next four years, and according to government sources the Eu8.311 billion budget for transport outlined in the PIIP plan includes the following major road projects – the Eu300 million Grande Lisboa, the Eu600 million Douro Litoral, the IP4 Amarante-Braganza, the Eu250-300 million IP8 Sines-Beja; the Eu250-300 million IP2 Beja-Castelo Branco; the Eu500-600 million IC12 Mira-Mangualde (three projects combined) and the IP3 Coimbra-Viseu.

With the problem of how to pay for the Portuguese SCUT shadow toll programme still unresolved – projected annual shadow toll payments from 2007 onwards over a period of 20 years are expected to reach Eu700 million – future Portuguese road deals are certain to follow the real toll template set down by the Eu795 million Litoral Centro last year.

That project featured Portugal's first variable-term real toll concession – a structure heavily weighted in favour of the state. Sponsored by Brisal and backed by a Eu575 million multi-tranche commercial bank and EIB facility lead arranged by Millenium BCP, Caixa Geral, Mizuho, Depfa and Banco Santander de Negocios Portugal (SCH), the variable term limits the amount of upside to Brisal, whilst exposing the consortium to a degree of traffic risk.

The concession comes to an end when the net present value (NPV) of the total toll revenue collected reaches Eu784 million, subject to a minimum period of 22 years and a maximum period of 30 years regardless of whether the consortium reaches the revenue threshold (for more details search 'Litoral Centro' ).

Roads to tender

Of the roads expected to come to market between now and 2009, only Grande Lisboa and Douro Litoral are already in tender. The parastatal roads agency IEP shortlisted Brisa and the Mota-led LusoLisboa consortium for the Grande Lisboa real toll in August. 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. A preferred bidder and financial close is expected in early 2006.

The Eu600 million Douro Litoral 30-year real toll concession located in the Porto area, will also be awarded in 2006 and a shortlist is expected early next year at the latest. The four bidding groups for the concessions are Mota, with BES advising; Somague/Sacyr with BPI advising; and Brisa/Teixeira Duarte with Millennium BCP advising.

More difficult to predict is Amarante-Braganza – two projects that may be joined together to make an economically viable real toll concession. Although bankers are still sceptical about the cost of the section from Amarante-Villareal, which involves tunnelling through mountains, at the very least the Braganza-Villareal section looks likely to appear in the market in 2006.

Of the remaining roads, the IP8 Sines-Beja will also tender in late 2006 and award in 2007. While the IP3 Coimbra-Viseu and the IC12 Mira-Mangualde (three projects combined) – will tender in 2007 and award in 2008.

SCUTs

The lack of resolution of Portugal's SCUT payments programme continues to put all potential SCUT refinancings on hold. Mota was said to be looking at proposals for a Eu3.8 billion bond refinancing for its four road concessions. Millennium BCP and Deutsche Bank have had a joint mandate since March 2004 for a refinancing of Beira Interior. And BPI, Caixa Geral and BBVA have got as far as they can on the Autoestradas do Atlantico/ Western Real Toll refinancing – a monoline has been informally selected and the sponsors are waiting on the formation of a government refinancing committee to formalise the share of benefits.

The government is looking at SCUT refinancing options. A deal not unlike that of TAV in Italy was under consideration – although the Eurostat ruling that TAV (for more details search 'TAV') should be on-balance sheet government debt has closed that option. Similarly the application of the Calle 30 scheme in Spain might be suitable for any future SCUT-type schemes where a real toll is not economically viable – but again Eurostat is looking into that deal, although it has yet to make a ruling.

The original SCUT programme is also not quite over. Beyond the seven-strong national SCUT programme (Grande Porto, the last of the national SCUTs, reached financial close in 2002) there is a smaller regional SCUT programme for Madeira and the Azores. The final SCUT in that programme – the Eu250-300 million Sao Miguel road in the Azores – is expected to go to BAFO in March 2006. Originally launched in 2002, the project was put on ice after one of the five bidders dropped from the final shortlist issued an appeal. Negotiations can now proceed with the two remaining bidders, Cintra and Somague/Sacyr.

For the moment the government and shadow sponsors have until 2007 to find a solution to the SCUTs – with both in relatively comfortable positions. IEP has EP (parastatal) status and therefore cannot go bankrupt – a comfort to sponsors. Similarly, EPs are not consolidated on the state balance sheet – a comfort to the government. Any solution will almost certainly involve some kind of long-term bond and a degree of sponsor compensation, probably through the extension of concession periods.

Any SCUT solution may also incorporate, at its simplest, changing a limited number to real toll. Government thinking as outlined in its election manifesto was that it would not change the SCUTs into real tolls. That thinking must and is changing, although according to government sources the SCUTs will stay as they are until a range of economic indexes – notably the CPI index – change and make real tolls more affordable to the consumer.

A number of options are under consideration. Some SCUTs in more economically affluent regions may go to real toll. The government is also looking at new ways of tolling the SCUTs, some of which have too many exits to toll effectively with booths. An independent team is currently presenting its first conclusions on an Electronic Tolling System and the government hopes to launch a tender for managers and suppliers of the system in 2006.

UK PFI-style maintenance concessions across the whole roads network are also under reconsideration – the plan first appeared around six years ago. The network may be split into six zones/concessions and tendered to the private sector with a view to making cost and efficiency savings.

RAVE or raving?

Portuguese light and heavy rail is also getting an upgrade. Eu727 million will go to metropolitan mobility in the PIIP plan. The Metro Mondego project around Coimbra looks set to definitely 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.

But the big rail news in the PIIP plan was the Eu1.5 billion earmarked for the RAVE high-speed rail project linking Oporto, Lisbon and Madrid. The project advisory role for RAVE was mandated last year to Goldman Sachs, Depfa and Finanzia. The winning bid was Eu1.5 million including a success fee – half that of the nearest other bid and around one-sixth of the highest.

The question for the winners is whether their investment pays out, and there is no certainty that they will end up with an arranging mandate. But even more uncertain is whether the deal will go ahead in its entirety, if at all? Most bankers have done back-of-a-cigarette-packet calculations and concluded that even if the link from Madrid to Lisbon were to wipe out all air travel and be priced at the same level it could not break even. Furthermore, with a new airport planned for Lisbon and high speed rail Pendolinos trains between Oporto and Lisbon on the Northern Line, that track could be upgraded thus making RAVE unnecessary.

The government's RAVE pitch will be out on 13 December and bank and sponsor reaction will probably dictate the plan's future.

Health given time

Portugal's longstanding plan to roll out PPP into the hospital sector has yet to spawn a deal. This is in part because of sponsor litigation over the tender process, in part because government tender committees are very slow to reach a decision (if they reach one at all) and in part because the Portuguese healthcare PPP concession system is overly complicated.

The Portuguese programme is complicated by the inclusion of clinical services concessions (Clinico) with infrastructure development (Infraco) – a programme unique to Portugal. Bidders are required to provide both, which makes Portuguese deals far more complicated than a straight hospital build – particularly the negotiation of cross-default default between the two companies.

The length of Clinico concessions is 10 years, compared to 30 for the Infracos, in anticipation of a highly competitive private sector health market. But the value of the Clinico concessions is far greater than the infrastructure – around 80% of total sponsor earnings from each concession.

The Ministry of Health is managing the hospital PPP programme (both at national and regional level) through Parcarias Saude (Partnerships, Health) and the Minister of Health recently conducted a workshop with banks and sponsors in a bid to re-evaluate the process for future deals along UK PFI lines

The existing programme – begun in 2002 – comprises 10 projects. Three are in tender tendered – Loures, Cascais and Braga – with Vila Franca de Xira expected to be out this month.

What was the deal nearest close, the Eu130 million Loures project, is to be put out to tender again to the four original bidders – the CGH consortium, comprising FCC and Misericordia do Porto; Somague/Jose de Mello; the Consis consortium, comprising Espirito Santo Saude and Mota; and HPP, featuring Caixa Geral and Teixeira Duarte – after Espirito Santo contested the tender on the grounds that the bids could not be compared, because the original tender guidance was not detailed enough.

Of the other deals, Cascais is expected to shortlist in early 2006: consortia bidding for the deal are Consis; HPP; Somague/Jose de Melo; and FCC with GPS. Braga is also expected to put out a preliminary bid ranking this month and has six bidders in place: Somague/Jose de Mello; Consis; HPP Saude; CGH; Ferrovial with GPS; and Sopol with Cespu.

Banks have been patient with the system and are still in place for all the schemes – although little time has been spent in terms of real due diligence on any of the deals because none have been awarded yet. Caja Madrid, BNP Paribas and SG are backing the Somague/Jose de Mello bid on Loures. Caixa Geral is backing HPP, in which it has an interest, as is BES backing Consis, which features Espirito Santo Saude. Milennium BCP is advising the Sopol-Cespu alliance.

Despite the lack of awards, Parcarias Saude is putting together a second wave of six hospital PPPs (the remainder of the original 10-strong programme), which are expected to be announced this month, and some of which may be out to tender in 2006. It seems unlikely that many will feature the Clinico element, given the slow progress to date. Parcarias Saude is also planning to tender two upgrade projects for the central teaching hospital in Lisbon and Oporto.

Next big wind

Despite the concentration on PPP, it is renewables deals that have kept much of the Portuguese lending market ticking over. The tariff regime changed in January to a 15-year fixed rate but the tariff itself was cut by around 12% – although previously licensed projects have the dual benefits of the old tariff for 15 years.

Two major wind deals – the Eu242 million SIIF Energies Portugal portfolio financing lead arranged by Millennium BCP, Dexia, Caja Madrid and BPI, and the Eu452 million Generg portfolio financing, lead arranged by BPI, Caja Madrid and BBVA – have closed this year, along with a handful of smaller wind farms: the Eu92 million Parque Eolico da Serra de Bornes lead arranged for Enersis by BPI; the Eu21 million Parque Eolico de Algoa de Cima lead sponsored by Enernova and HGP and lead arranged by BPI; and the Eu24 million Degracias and Rabacal wind farm lead arranged by Caixa Banco de Investimento for Entreventos.

More wind finance is a certainty. The Portuguese government has increased the renewable energy target from 3.5GW to 4.5GW and bids for up to 1200MW of renewables (wind) capacity are due on 30 January 2006.

The license is Phase 1 in a two-phase auction totalling a maximum of 1,800MW. Phase 1 involves a minimum of 800MW with another 400MW (200MW of which will be overcapacity) obtainable depending on whether bids meet certain criteria – although what those criteria are has yet to be clarified by the Portuguese government.

Phase 2 is a minimum of 400MW, rising to 600MW on the same grounds as Phase 1. Bids in both phases must also feature a commitment to building wind energy manufacturing clusters (ideally turbine manufacturing plants) and financial backing for an R&D fund (Eu35 million for Phase 1) to be set up by the Portuguese government. Consequently financing for Phase 1 is expected to be Eu1.2 billion-plus if the full 1200MW is awarded.

Bidders for the Phase 1 license include: Enercon with EDP, SIFF, Generg and Endesa, via TP and Finerge; RE Power with Galp and Enersis; Gamesa and Iberdrola; and Union Fenosa, possibly with GE. Banks are courting the various groups for mandates and indications from the Portuguese government are that bidders should come in with a discount to the current feeding tariff – around 5% below the current fixed tariff.