Long-term public-private-partnership PPP solutions do not fit with short-term politics - and political terms do not get much shorter than in Portugal.

One month after the close of the Eu795 million Litoral Centro real toll (the first road deal in Portugal in two years) and the financial advisory tender for the long awaited Eu12 billion RAVE high speed rail link between Porto-Lisbon-Madrid, political paralysis has again hit Portugal's PPP programme. New tenders will continue - but it will be mid-2005 before any new deals are awarded.

Portuguese President Jorge Sampaio has called an early general election on 20 February 2005. The likely election outcome is an opposition win by the Socialists headed by Jose Socrates - a civil engineer to the right of the party who was Minister of the Environment under the Guterres government (the progenitor of PPP in Portugal).

The Socialists have already indicated a reverse policy on some of the public spending cuts put in place by the two SDP-led regimes since 2002, and to make that happen and deliver on basic infrastructure, a more proactive and fiscally realistic application of the Guterres PPP mantra is a must given the state of the Portuguese national accounts.

After the election of the SDP in 2002 the Portuguese PPP road programme slowed, the prisons PPP competition was suspended, and although the previous government's hospital PPP programme was retained, a deal has yet to reach financial close.

Much of the cold PPP climate has been blamed on cost - notably state payments to be made on the flagship SCUT shadow toll programme begun in 1999. Portugal faces a SCUT operator bill of around Eu650 million in 2004-2007. From 2007 SCUT payments will absorb the total annual IEP (national transport authority) road budget. And both the Lisbon Airport and RAVE high-speed rail deals were postponed (Lisbon Airport indefinitely) because of the SCUT cash drain.

But the reality is that while the SCUT programme was built on highly optimistic economic growth forecasts, it is the economy that has also failed to deliver. The IEP budget has been halved in the last three years. And although SCUT payments will have increased tenfold to 0.4% of Portuguese GDP by 2007, Portuguese GDP has been falling since 2002: In 2005, GDP per capital is expected to be 65.1% of the EU-15 average, behind that of new EU members Slovenia, Malta, Cyprus and, since 2002, Greece.

Renegotiating SCUTs, PPP and the balance sheet

Renegotiating the SCUTs and redefining Portuguese PPP will be key to both infrastructure development and balancing the government books, particularly the off-balance sheet books, post-February 2005.

The Socialist opposition has already announced that it will leave the SCUTs as shadow tolls if it gets into power. But the reality is that as soon as the new government has to sign a SCUT cheque that policy will almost certainly reverse.

Portugal has a simple choice - responsibly manage off-balance sheet debt solutions and invest its way back to economic growth or cutbacks, a policy that has failed to deliver since 2002.

Portugal was the first country to breach the Eurozone's Stability and Growth Pact budget deficit target of 3%, with a gap equal to 4.2% of GDP in 2001. The government met the 3% target in 2002 and 2003, but only with substantial one-off revenues. Despite a hiring freeze and other measures, the Portuguese government has a structural budget deficit in 2004 projected at 4.9%.

Furthermore, the 2005 budget presented by the current, albeit short-lived, Santana Lopes government in October 2004 projects a structural deficit in excess of 3% and violates the 60% limit on public debt.

Although fiscally repressive, the current government has moved from estrangement to counselling - in the form of KPMG - in its relationship with the country's PPP programme.

The SCUTs only officially hit the skids in late September 2004 when Public Works Minister, Antonio Mexia, announced it was no longer financially viable for the government to continue payments under the shadow regime. Mexia - aptly nicknamed "Action Man" by the financial sector - has mandated KPMG as advisory and put a hectic deadline of first quarter 2005 for renegotiating the SCUTs into real tolls.

Even without the election, that timetable is not going to happen. All the consortia involved are veterans of the toll roads market, are looking forward to benefiting from refinancing post-construction, and the roads involved were structured as shadows in the first place because the traffic volume was not predicted to, and based on the most recent figures does not, cover real toll debt service.

A range of SCUT solutions are being proffered by bankers - from extending the length of the concessions to some form of quasi sovereign bond issued against future predicted real toll revenue to pay off the concessionaires. Whatever shape the deal takes it will have to convince Eurostat that it is off-balance sheet and will ultimately involve compensation to the operators.

Real tolls template
Future Portuguese road deals are certain to follow the real toll template set down by the Eu795 million Litoral Centro last month. The project features Europe'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 will come 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. The concession ends after 30 years, regardless of whether the consortium reaches the revenue threshold.

Litoral Centro will be in the syndication market in first quarter 2005, although with so few deals around in the last two years Portuguese banks are in no hurry to sell the debt on.

Further real tolls are expected in the coming year. The Eu700 million Douro Litoral highway, just south of Porto, was tendered in June and was to have been awarded in March 2005, but the election will put that date back.

The Eu300 million Grande Lisboa, which involves the completion of a ring road around Lisbon, was also tendered in February and banks are waiting on evaluation reports due in early 2005. 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.

And yet to appear in tender are the Eu250-300 million IP8 Sines-Beja; the Eu250-300 million IP2 Beja-Castelo Branco; the Eu500-600 million IC12 Mira-Mangualde and the Eu150-200 million Mafra-Malveria-Ericeira. There is even talk of a third Tagus crossing, although Lusoponte has an exclusive right to take any road concessions on the remaining 30km of river, so only if it declines will a deal go to tender.

The Somague-led Western Concession (Autoestradas do Atlantico) real toll, first financed in 1998 and expanded in 2002, is also in the process of refinancing. Under advisory from BPI and Caixa Geral, the banks have the bond structure in place and are waiting to appoint a prelim manager and monoline - probably FSA or Ambac.

Bond financings, although a reality, are difficult to get off the ground. Portuguese securities law prohibits companies with less than two years' trading records to issue bonds (and to no greater value than paid up share trading capital). Cintra overcame this by using an offshore company to issue bonds to refinance the Algarve concession: XL Capital wrapped the Eu126.5 million bond issue (together with an EIB loan) in July 2001. But a planned bond deal for the Norte Litoral concession was scrapped after sponsor Cintra could not agree benefits with XL.
SCUT securitisation

Ironically, the politically vilified SCUT programme, once at the cutting edge in European PPP, is still spawning financial innovation - albeit indirectly.

In November a unique securitisation structure for SCUT contractors came to market - Eiffel. The deal monetises upfront receiveables due until October 2007 from Eu1.292 billion in SCUT contracts - the Eu417 million Beira Litoral, the Eu400 million Grande Porto, the Eu375 million Norte and the Eu99 million Costa da Prata - won by the Mota-led consortium ACE.

Arranged and sold by Deutsche Bank, the fundos de titularizacao de creditos (FTC) programme has no direct link with the SCUT programme and is unlikely to be affected by any renegotiations next year. The deal is overcollateralised to mitigate the weakness of the main sponsors - Mota, BPC and OPCA - which are all under investment grade. And if the over-collateralisation on the deal drops to 3x - currently 4.85x - cash will be trapped until a nine month reserve account is in place.

While there is little risk on the deal for the private sector, there is a small niggle for the public sector. The banks have the right to halt construction payments, which has happened a number of times already. But to date construction has not been hit.

Despite the weakness of the sponsors, the risk mitigants in the deal - primarily the overcollateralisation and a debt service reserve account to cover any shortfall in receiveables from the largest project - brought a BBB- rating from Standard & Poors.

The SCUT programme has also not had its last gasp. Beyond the seven strong national SCUT programme (Grande Porto, the last of the national SCUTs, reached financial close in 2002) there is a smaller SCUT programme for Madeira and the Azores, which lie beyond the remit of the central government.

The first of these deals, Vialitoral in Madeira, closed in 2000. This month the follow up Eu250 million Via Expresso has closed. All the big Portuguese banks - Caixa Geral, BES, Millennium BCP (also advisory) and BPI - are participating along with Caja Madrid. The deal is very similar to Vialitoral with construction risk transferred to the private sector and an availability shadow payment mechanism over 30 years.

The final SCUT - the Eu250-300 million Sao Miguel road in the Azores - launched in 2002 as a traditional SCUT with shadow plus availability payments. Originally awarded to Somague and Ferrovial, the evaluation report was contested by five bidders and the deal is currently awaiting another report.

RAVE and rail

The Portuguese rail sector has yet to develop the impetus that typified the roads programme pre-2002. For example, to date, the Porto Light Rail project, under advisory from BPI, has comprised public and EIB funding. The second phase, which involves investment of Eu700 million, may go the PPP route in 2007.

But if there are not many Portuguese deals in number, the Eu12 billion RAVE high-speed Porto-Lisbon-Madrid project more than compensates in volume.

The RAVE financial advisory mandate, tendered in November, will be delayed by the general election - not good news given the current EU funding round ends in 2006 - but should be in place by mid-2005.

The shortlist is down to five bidding groups: Millennium BCP with Citigroup and Royal Bank of Scotland; BPI with Morgan Stanley and UBS; Banco Efisa with HSBC and PricewaterhouseCoopers; Finanzia with Depfa and Goldman Sachs; and finally Caixa Geral with Deutsche.

The current Portuguese government favours the Dutch HSL Zuid (for more details see www.projectfinancemagazine.com) EIB/commercial debt model for RAVE. But with the election looming, and given the size of the deal and the international names in the bidding groups - many of which worked on the Italian TAV programmes and the London Underground bond deals for Metronet and Tube Lines - the financing may take the form of a phased bond programme. Whether the Portuguese government will have to offer guarantees, as in TAV, or an indirect letter of comfort, as in Tube Lines, remains to be seen.

Hospital waiting

The new corner stone of Portuguese PPP development is the hospital programme which is proving slow to move - partly because of successive changes of government in the past four years and partly because the Portuguese programme is complicated by the inclusion of clinical services concessions (Clinico) with infrastructure development (Infraco).

In August 2002 the Portuguese government enacted Decree Law 185/2002 for the development of 10 new and upgraded hospitals at a total value of Eu1.5 billion.

Tenders for two of the hospitals - Loures (Eu800 million NPV) and Cascais (Eu400 million NPV) - have been launched, Braga will be out on 21 December, and of the remainder Sintra and Vila Franca De Xira are expected next year while Evora, Faro, Guarda, Vila do Conde Braga and Vila Nova de Gaia are more distant. To date no deal has been awarded.

The Ministry of Health is managing the hospital PPP programme (both at national and regional level) through Parcarias Saude (Partnerships.Health) with advisory from BPI. In March 2005, Loures is expected to shortlist two bidders from the four consortia announced in November  - Consis (BES with Dexia); Somague/Jose de Mello; Hospitais Privados de Portugal (owned by Caixa Geral); and CGH. The final award will be towards the end of 2005.

The Clinco (clinical services) and Infraco (DBFM contract for the hospital infrastructure) programme is 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 tenor 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 political mantra behind the hospital programme, and the reason for its complexity, is that it is not just about capacity - the Clinico/Infraco structure allows for more efficiency benchmarking according to the Portuguese government. In that vein, private hospitals and privately managed public hospitals are also to be allowed to provide health services to the National Health Service (Serviço Nacional de Saude or SNS). And there are further plans for turning 34 hospitals into publicly owned commercial companies similar to Foundation Hospitals in the UK.

Municipal projects

Despite the problems with the national PPP programme the concept is beginning to devolve down to municipal and regional government level. The Azores and Madeira have always had their own PPP mandate, divorced from the national PPP programme, in the form of the Expresso, Litoral and Sao Miguel SCUTs. But for the first time municipal governments are studying the PPP concept for schools and local healthcare infrastructure and bankers are confident the first advisory mandates may appear next year.

Beyond developing local PPP the Portuguese municipal market has been small but buoyant. BPI has a Eu120 million joint municipal waste mandate with Caixa Geral due to close before year end. And co-arrangers Millenium BCP and Caja Madrid have recently closed two local water deals: the Pacos de Ferreira water concession, comprising a 23-year Eu37.5 million long-term facility that closed in June; and the Eu60 million Barcelos water deal closed at end of September. Both deals were sponsored by Somague.

A Eu300 million solar project for the municipality of Moura is also underway. Negotiations between the promoter (Amper Central Solar), the municipality, BP Solar, local banks and the government's Directorate General for Energy are expected to be resolved in the coming months. BP Solar is turnkey on the project.

The banking market

Pricing in the Portuguese market is steady despite the relative lack of major deals. Most recently Litoral Centro came in at 115bp-130bp over Euribor depending on performance - respectable for the Portuguese market where roads pricing has long been tighter than in neighbouring Spain.

But dogged by politics, the majority of Portuguese banks have started looking cross-border for lending and arranging opportunities. BES is on of the lead arrangers on the M5 motorway project in Hungary and is backing the Corsa-Corvian consortium on the Madrid-Toledo real toll in Spain. BCP is also in the lead arranging group for the Madrid-Toledo real toll. Financial close on both projects is imminent.

Caixa Geral is similarly actively seeking mandated lead arranger (MLA) roles in the Spanish market and opened an office in Madrid this year. The bank participated in the Ocana La Roda real toll  in October and is mandated along with Calyon and BBVA for the Eu116 million Palma-Manacor Sacyr-sponsored shadow toll in Mallorca, which is also closing imminently.

Whether the next change of government will produce a more dynamic domestic market is uncertain. For example bankers still complain that the bidding process and timing between BAFO and award is interminably long. Local consensus is that a change of government will have little or no impact on the slow pace of PPP development. Socrates has the name - but does he have the game?