There are good legal fees to be had in the Greek public-private-partnership (PPP) market – not because the law is complicated but because challenging tenders has become standard practise. And protracted legal battles are one of the reasons why Greece has not closed a PPP deal since the signing of the Athens Ring Road project in 2000.

Greece has now fallen behind new EU entrants like Hungary and the Czech Republic in PPP development. To try and rectify this the Greek parliament passed a new PPP law in September aimed largely at facilitating the use of PPP in areas traditionally considered off limits to the private sector.

Similarly, a long-planned Eu4 billion to Eu6 billion scheme to upgrade the country's road network by way of six projects finally began moving this year, initially raising hopes that the country's next PPP deal – the Thessaloniki Submerged Tunnel Project – would close in the second quarter of 2006.

But a November 22 decision by the Supreme Court to suspend negotiations on the project has ended any chance of an imminent close. And it may now be hard to convince international sponsors and lenders that the latest positive noises emanating from politicians amount to anything.

"If [the Thessaloniki tunnel project] falls through the private sector will be sceptical about going into Greece," says Madhavi Gosavi, a partner at Norton Rose, which along with Linklaters and Allen & Overy has been involved in most of Greece's PPP deals to date. "They would rather go into markets like Germany or Hungary."

Such an exodus would be bad news given that Greece desperately needs to procure private sector investment. The budget deficit is larger than Maastricht rules allow for eurozone members and the country faces hefty fines if the government fails to tighten spending.

However, there are signs that Greece is getting better at tendering contracts. Documentation for contracts is improving, reducing grounds on which they can be challenged in the courts, and on the road projects there is a stipulation that bid submissions must include letters of support from lenders.

New PPP law

One of the biggest barriers to the creation of a regular deal flow has been the constitutional requirement that all PPP projects have to be individually ratified by parliament. The new law allows the government to automatically bypass parliament for all projects worth less than Eu200 million, and it also gives the ministers discretion to approve larger projects without turning to the legislature.

The legislation sets up two committees to oversee the tendering process. The Ministerial PPP Committee (MPPPC), chaired by the Finance Minister, and the new Special PPP Committee (PPP Committee), which is a branch of the Finance Ministry. Modelled on the UK's PPP taskforce, the latter committee's role is to identify potential PPP projects and to present them to the MPPPC for approval.

The PPP Committee will renew the list of projects requiring MPPPC approval every six months, and the MPPPC has two months to approve each project. Once a project is approved, the PPP Committee will be responsible for running the procurement process while the MPPPC will retain overall control.

As well as setting up the machinery for procuring private sector investment, the new law also determines how key risks should be dealt with. It places certain obligations on the concession awarding bodies, such as to award licences and permits promptly, announce environmental requirements prior to tender, deal with archaeological finds and carry out any necessary expropriations.

Project companies will also receive preferential tax treatment, while financial contributions from the state will be made exempt from VAT – clearing up an area of ambiguity that existed under the old regime, where there was confusion as to whether exemptions needed parliamentary ratification.

Deals to date

Greece learnt the lessons that are now enshrined in the new law through experience with large infrastructure projects. Three projects in the 1990s, including the Athens Ring Road, were closed after lengthy tendering processes. The government cancelled a fourth, the Thessaloniki Metro Project, in 2003 – four years after the concession signing – when the Bouygues-led consortium awarded the contract missed a deadline to agree on the project financing.

It is this last failure that taught the Greek authorities the importance of having the financing sorted at an early stage of the tender process.
"The Greek state did everything it could to get the deal because it wanted [the Thessaloniki metro] for political reasons," says Giorgos Kotsoridis of Ethniki Bank, which has advised the government on all of its PPP deals to date.

The Ministry for the Environment and Public Works is now working on tendering out a slew of six 30-year real toll concessions. Five of these involve upgrading stretches of motorway along two axes that form part of the Trans-European Road Network: the north-south PATHE (Patras-Athens-Thessaloniki-Evzoni) highway and the west-east Egnatia Odos, the ancient route that linked Rome to Byzantium, modern-day Istanbul.

The importance of these routes to Greek traffic should ensure that the level of traffic risk involved is minimal.

The first of these projects to be launched for tender was the Eu575 million Maliakos-Kleidi project, which involves the construction of a 25.3km section along the northern part of the PATHE and also includes the operation and maintenance of 230km of existing motorway. Launched in September 2003, it was suspended for six months in 2004 and was overtaken by the Eu500 million Thessaloniki Submerged Tunnel Project – a 30-year real toll concession for a 6km stretch of road running beneath the city's seafront.

Greece's previous government, the left-wing Pasok party, introduced the projects, but the conservative New Democracy party has pursued them with fresh zeal since coming to power in 2004. Both the Maliakos Kleidi and the Thessaloniki tunnel projects are at the preferred bidder stage, while bid submissions are due on January 9 and January 10 for two more projects – the Eu500 million Corinth-Tripoli-Kalamata road and the Eu1.4 billion Ionia Odos project respectively. The two remaining projects are scheduled for launch early in 2006.

"The government is sounding a lot more positive," says Gosavi. "Greeks realise that they have to compete with Poland, the Czech Republic and Slovakia and that they are a bit behind. They can't afford to take their foot off the accelerator."

Judicial stasis

But while slowing down may not be an option for the government, there is nothing it can do to stop the judiciary from applying the brakes instead. The award of the Thessaloniki tunnel project to the Greek consortium Thermaiki Odos was challenged in August on the grounds that the bid would not be deliverable. The Supreme Court waited until November before failing to either accept or reject the appeal, instead deciding to suspend negotiations.

"This is the worst news we could have had," said one international banker with extensive Greek experience, speaking soon after the decision became known. "The last thing we wanted to hear was 'let's hold on and scratch our heads'. We've been scratching our heads for three months. If the court had decided to uphold the complaint, fine, but this isn't a decision, it's a disaster."

It is unclear for how long the project will be suspended for, but market sources have suggested it could be six months. Meanwhile, there is no date for when the Maliakos Kleidi project, awarded to Bilfinger Berger/Hochtief and underwritten by Calyon, will progress from the preferred bidder stage to concession signing.

But Ethniki Bank's Kotsoridis claims that while legal delays blighted past PPPs, they never actually stopped them. He also points out that submission dates for the Corinth-Tripoli-Kalamata and the Ionian Odos roads were put back from late 2005 in order to iron out glitches in the tender documentation that could provide grounds for further legal challenges.

"If we take a historical journey, only one project hasn't happened: the Thessaloniki Metro," he says. "Other projects also had problems, but they were overcome. The bad thing this time is that however much we try to clear things up, something else comes up."

"It's frustrating," he concedes. "But hopefully things will advance." It is a sentiment echoed by Gosavi, who says she always advises clients that are considering bidding in Greece to factor in time lost to legal action.

If the legal challenges can be overcome, there are clear differences in the financing structure of the new projects compared with Greece's past deals – notably, lenders have shown that they are willing to take on real market risk in Greece, which they were unwilling to do in the 1990s when the Athens International Airport project, the Rion-Antirion Bridge project and the Athens Ring Road were all backed by government guarantees.

Before the Thessaloniki tunnel was suspended by the Supreme Court, the preferred bidder, Thermaiki Odos, was finalising the details of the Eu450 million project debt, arranged by Bank of Ireland (Eu250 million) and Greece's Eurobank (Eu200 million). Negotiations were also underway for the EIB to take on half of the debt.

The debt would have a 20-year tenor with a margin of 150bp and an ADSCR of 1.3x. Pricing is lower than on Maliakos Kleidi, where it is though to be around 120bp. The different pricing is down to the fact that the Thessaloniki tunnel is a greenfield project and the only one of the six that is neither on Greece's north-south or west-east road axes.

By contrast, on the Rion-Antirion Bridge, a 42-year real toll concession, private commercial debt consisted of a 7-year letter of credit for Eu407 million, priced at 125bp. Financing also comprised an 8.5 year term loan from the EIB for Eu370 million and a government loan of Eu230 million, while the equity stake was Eu77 million, 10% of the total.

Where's the deal pipeline?

"The courts pose a significant problem," says Panagiotis Arkoumaneas, the Ministry of Health's special advisor for PPP/PFI, when asked if the Thessaloniki tunnel saga might repeat itself when projects come to tender under the ambit of the new law. "If there is a pipeline then everyone will concentrate on their bidding strategies. The challenges come when there are only one or two projects in tender."

The problem, as things stand, is that will and determination are all Greece has right now in lieu of a project pipeline; on optimistic estimates it will be a year before the first projects start launching for tender.

A new head of the PPP Committee and taskforce, Leonidas Korreas, has been appointed and his first task is to hire people to staff his taskforce, with a particular emphasis on getting specialists from the private sector.

The Ministry of Health became the first to announce a list of three pilot projects: an 800-bed general hospital in Athens, a 250-bed transplant centre, also in Athens, and a 400-bed paediatric unit in Thessaloniki. These will now be the subjects of feasibility studies, once advisory mandates are tendered.

So what is to prevent these three projects also being bogged down by court actions? "It's a question of experience and doing things right," says Arkoumaneas, who points out that the UK's St Barts hospital has experienced difficulty without scuppering other PFI deals. "In the past, tender documents weren't the best. People don't go to the courts with procurements from all ministries."

Leonidas Korreas believes the expertise his taskforce will provide enables tendering authorities to avoid the legal pitfalls of procuring PFI contracts. "We are giving public authorities an instrument they can use to fund new investments," he says. "They can either come to us and we'll work together, or they can do it on their own terms, but we believe they will work with us."