The Socialist election victory in February was greeted with ambivalence in the Portuguese banking sector.

Three changes of government in as many years, a history of long-term state investment plans that have normally gone way beyond the term of any sitting government (and have thus changed with every change of government), cuts in public spending under the previous SDP regimes and the interminably slow pace and expense of Portuguese tender and approval processes – the combination had left Lisbon bankers looking at projects abroad or domestic sectors where projects could be done despite the government (renewables, for example).

The pace has still to pick up. But the new government headed by Jose Socrates, a civil engineer on the right of the party who was Minister of the Environment under the Guterres government (the originator of PPP in Portugal), has issued a Eu25 billion ($30 billion) investment plan with a difference – it does not go beyond the next election date in 2009.

Portugal's project sector appears to be faced with an open invitation to get moving – a significant step in a country where the hospital PPP programme begun five years ago has yet to proffer a concession award (although to some extent private sector complaints over the tender process are to blame for delays).

Four-year investment plan outlined

Although lacking in detail, the new investment plan is ambitious and, allowing for the difference in population and tenor, on a par with Spain's Eu242 billion 15-year plan

Of the total Eu25 billion investment planned, 22% will go on energy, 33% on transport, 9% on the environment, 18% on IT, 15% on regional development and 3% on social welfare.

Infrastructure accounts for Eu16.799 billion of the plan with Eu2.131 billion earmarked for environmental projects, Eu5.563 billion for energy, Eu8.311 billion for transport and Eu795 million for social projects.

Where the money will be sourced from breaks down as follows: the state Eu7.63 billion or 30%; the private sector side of PPP Eu5.895 billion or 24%; private sector sole ventures Eu7.453 billion or 30%; and other sources Eu5.022 billion or 16%.

Whether the private sector will step up and provide 50%-plus of the investment depends largely on the Portuguese economy. In 2005, GDP per capita is expected to be 65.1% of the EU-15 average – not good and behind that of new EU members Slovenia, Malta, Cyprus and, since 2002, Greece.

But arguably an investment leap of faith in Portugal would not be misplaced. The economy is expected to make a small recovery by 2006 and according to the May 2005 OECD investment outlook. "If the new government stands by its decision not to rely on one-off measures to curb the fiscal deficit [as the previous SDP governments did], the 3% of GDP [Maastricht] deficit limit will be overshot by a large margin in 2005 and 2006. But this only underlines the urgent need for consolidation measures, in the form of fundamental reforms rather than temporary fixes."

Since liberalisation of the 3% Maastricht ceiling – a practical recognition of the fact that France and Germany, let alone Portugal, rarely meet it – the deficit issue does not carry the weight it once did. And while the flavour of Portuguese budget reform is unlikely to be to the OECD's taste, it is nevertheless a fundamental and realistic four-year investment plan.

Significantly the new plan does not include SCUT payments, which are designated operating expenses on the state budget. Much of the previous government's antipathy to PPP was due to the vast state payments to be made on the flagship SCUT shadow toll programme begun in 1999.

In June the first two big government SCUT payments went out – for Costa de Prata and Beira Interior – at around Eu40 million each. A second payment is due at the end of this year with the next critical date being 2007 when SCUT payments are expected to absorb the total annual IEP (national transport authority) road budget (as designated by the previous government).

The new government seems calm about the SCUT issue. Before the election it stated it would not reform the shadow tolls into real tolls, and to date has stuck to that manifesto. But some of the shadows will almost certainly have to be renegotiated as real toll and the options are limited.

Expectation was that Portugal would attempt to raise money to compensate shadow toll sponsors with a cheap bond issue (priced at government debt level) structured though an entity like TAV in Italy. But given that Eurostat has just decreed TAV as government debt, that now appears unlikely.

For the moment the government and shadow sponsors have two years to find a solution – with both in relatively comfortable positions. IEP has EP status, which means it cannot go bankrupt – a comfort to sponsors. Similarly, EP's are not consolidated on the state balance sheet – a comfort to the government.

Roads refinancing back on?

The most likely outcome is that the next roads programme – expected to appear in the coming months with detailed budgets that take into account SCUT payments and a new financial model – will be a departure from the past. Furthermore, there is a possibility that some of the long planned real toll and shadow refinancings will now go ahead with state and sponsors sharing the benefits.

To date only one SCUT has successfully refinanced – the SCUT do Algarve with a bond wrapped by monoline XL Capital. The Norte Litoral – like Algarve, sponsored by Ferrovial/Cintra – was also expected to be bond refinanced in mid-2004 but rumour in the market is that the sponsors turned down a 50/50 benefit share agreement proposed by the then government committee that looked at the deal.

The new government has made no official toll road refinancing policy announcement, but talks continue between government, sponsors and banks on a project-by-project basis. Mota is 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, which was put on hold last year after rumours that the shadows were to be turned into real tolls. 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.

New and revived projects

New road projects are also looking likely. The secretary of State for Public Works has announced 550km of newbuild roads in the next four years. Although there is no indication as to how much will be as PPPs, around 50% looks likely given the overall PPP budget figures.

New works are expected on the IP3 and IP4 (a PPP for the Amarante-Branca link on the IP4 in northern Portugal is already under informal discussion). There are also two projects on the IP2 – the Estramoz-Portalegre link and Beja-Castelo Branco. And work is planned on the IP8 Porto-Sines-Spanish border section.

Past planned deals also look set to make a reappearance in the market. The Eu300 million Grande Lisboa, which involves the completion of a ring road around Lisbon, was tendered in February 2004 and will shortlist this month. Bidders include the LusoLisboa consortium comprising Mota/Engil, BES, Caja Madrid, ING, Mizuho and Banca OPI; Brisa supported by BCP, Caixa Geral and BPI; and Ferrovial supported by SCH.

The IC12 Canas-Mangualde should also be tendered at the end of the year, and even the Lisboa Norte – abandoned by the previous government when the Lisbon Airport deal collapsed – is expected to make a comeback along with the Lisbon Airport deal itself (Eu65 million of the new investment plan has been earmarked to revive the deal).

Portuguese light and heavy rail is also getting an upgrade. Eu727 million will go to metropolitan mobility and Lisbon Metro and Metro Mondego projects looks set to go ahead, although they will almost certainly be on-balance sheet. More significantly for the finance market, Eu1.5 billion has been earmarked for the RAVE high-speed rail project.

The project advisory role for RAVE was mandated last year to Goldman Sachs, Depfa and Finanzia after a comical tender that saw some bidders come in 20 minutes past the deadline and hence get disqualified. 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.

Clearly the winners are hoping to win the arranging mandate although the advisory tender documents clearly state the advisor will not have preference in a future arranging competition.

Despite the political upheaval of the past few months infrastructure deals have continued to roll in Portugal – although nothing like on the scale of the Guterres government pre-2002.

Millennium BCP closed a small road deal in April for the municipality of Mafra. The Eu149 million 20-year deal for MafraAtlantico priced comfortably above 100bp over Euribor. And syndication of the Litoral Centro real toll closed at the beginning of 2005. Refinancings have also closed for the Sporting (Eu115 million) and Benfica (Eu45 million) stadiums, originally financed three years ago.

More energy

But it is in the renewables sector that Portugal has proved most active. The tariff regime changed in January to a 15-year fixed rate but the tariff was cut by around 12%. The government nearly got away with applying the new regime to projects that had already been licensed but not yet built. But on the day the bill was meant to go to the Council of Ministers it was leaked – consequently previously licensed projects have the dual benefits of the old tariff but for 15 years.

Two major wind deals – the Eu242 million SIIF Energies Portugal portfolio financing and the most recent Eu452 million Generg portfolio – have closed this year along with a handful of smaller wind farms.

More wind finance is a certainty. The Portuguese government has increased the renewable energy target from 3.5 GW to 4.5GW, so there are still 1GW of licenses to sell – albeit under the new tariff regime. And although solar energy is in its infancy, there are two Portuguese deals in the pipeline – one of them being the 60MW Eu300 million BP Solar project advised by Millennium BCP. Both deals are renegotiating pricing because a mistake in decree law documentation – apparently brackets in the wrong place – has reduced rates by between 30-40%.

Iberian energy liberalisation failed to materialise as predicted in June and consequently a potentially massive securitization of power purchase agreements compensation for Tejo Energy and EDP was put on hold. But the Portuguese energy market is expected to account for 22% of total investment from now until 2009.

The coming year will be make or break in terms of confidence in Portuguese infrastructure investment. Tendering and licensing need streamlining and the first definitive deals need to appear before Portugal pulls the international banks back into its project sector in the way it did pre-2002.