With Portugal's SCUT programme largely done, the focus has now turned to Ireland, where the National Roads Authority has an aggressive programme under way to finance as many as 11 real toll road projects over the next four years. With two of the projects at the BAFO stage ? one set to be signed in the next 10 weeks ? all eyes are on Ireland. But the projects have hit a few snags of late, and some are saying the programme could be hard pressed to close to the satisfaction of all parties in the given deadline.

The Irish programme brings to the fore some of the issues that project sponsors, bidders and funders find toughest to deal with, and how financing strategies are changing to meet those needs. The programme is part of Ireland's National Development Plan under which I£50 billion of public and private funds is to be invested in road and infrastructure projects between 2000 and 2006. The toll road scheme now includes five projects to either build or upgrade existing roads and could see the creation of as many as 11 different toll roads by the end.

The two most advanced projects are the N4/N6 Galway to Dublin route ? estimated to cost between Eu253 million and Eu380 million with a 30-year concession, and the N1 Dundalk Western Bypass ? with an estimated cost of between Eu63 million and Eu126 million and a 30-year concession. The N4 project has BAFO submissions in, and the N1 has a shortlist of two bidders and BAFO submissions are expected in early 2003.

In addition to these are the N25 Waterford Bypass ? an Eu125 million to Eu250 million project which is also down to a shortlist of two; the N8 Cork to Dublin route ? with an expected cost of Eu150 million to Eu250 million and for which four bidders have been shortlisted; and the N3 Clonee-Kells route ? where the structure has yet to be finalised but expressions of interest have been received.

There has been speculation in both the press and the project market that NRA projects are getting bogged down. Everything from minor slowdowns to budget and planning problems to even greater difficulties have been reported, most of which, according to Gerard Murphy, head of PPP at the National Roads Authority (NRA), is just not true. ?We are very pleased with the progress and with industry response. The first pilot should be signed in the next 10 weeks and I am happy that negotiations have gone ahead and the outcome has been very satisfactory for all parties,? he says. ?I am also convinced that when the first pilot does close, all of the rumours that have been appearing will prove to be unfounded.?

The scheme that has received the most flack is the N4. Rumours range from small setbacks all the way to a supposed retendering, which Murphy insists has not happened. But what is true, and could be more worrying, is market response to the contract and the risk profile of the project.

A source close to one of the shortlisted bidders says there are a number of concerns that have not been addressed by the NRA. ?There has been broader comment in terms of the overall structure of the contract. There is no compensation being given to provide for termination due to operator default, and the circumstances in which an operator can default are wide and varied,? he explains.

In addition, there is a free route in competition with the tolled motorway for which, according to one participant, the government is giving no compensation and has no confirmation from the local authority that they won't upgrade the competing route.

Robert Bain, a consultant in Infrastructure Finance Ratings at Standard & Poor's, says: ?Because real toll roads involve payment at the point-of-use, this introduces an extra element of uncertainty relating to consumers' price response, so the benefits of using the toll road must be clear. Immediately, when looking at the NRA projects, the Republic introduces this layer of complexity. And on some of the Republic projects the benefits may not be as clear as one would like, particularly when considering competing routes, time savings and drivers' willingness-to-pay.?

One market participant voiced scepticism over the value for money which would result given the high risk transfer. And another, closely involved in the deal, says the government is trying to transfer too much risk: ?They are being very demanding in terms of risk transfer. Consequently the level of due diligence being done is increased and in certain instances risks are being transferred to the private sector that they aren't in a position to manage.?

Murphy at the NRA disagrees: ?The NRA entered into negotiations with two shortlisted bidders and came to agreements with both of them over the terms. The bids show excellent value for money. The keen pricing and tight margins illustrate that we have produced a completely bankable contract.

?During negotiations the NRA modified its position to take account of market concerns. At this stage we have a completely bankable contract that we will roll out on the remainder of the program.? The changes to the NRA's position during the negotiation ? which Murphy says he cannot discuss ? led to much of the speculation in the market about what was really happening.

Traffic forecasting

Whether or not the Irish projects will eventually be viewed as market-leaders or merely deals that managed to get done, they do highlight some of the issues that are core to all toll road projects ? how the level of uncertainty and the risk profile affects the financing of a deal. Says Bain at Standard & Poor's: ?Financing for most of these projects is heavily reliant on the demand profile driving the revenue stream. The impact is that investors need a high degree of certainty.? But on toll roads there generally is a great deal of uncertainty.

Bain says the key to making investors comfortable with that uncertainty is in the risk modelling. ?We need forecasters who can answer the type of questions that investors are going to focus on. They must demonstrate an in-depth understanding of the road and its attributes, competitive routes, and disaggregated consumer behaviour.?

One of the ways to mitigate risk, and decrease the uncertainty inherent in a deal, is to ensure tolls are as low as possible. To make this cost effective on the financing side, it means spreading the repayments over a longer period. As one market player explains, this is already the norm in the PFI market in the UK: ?Senior loans with a tenor of 25 or 28 years are quite common for a 30-year concession in the UK. But the issue is that while many commercial banks in the UK are now comfortable with this, the market is still relatively young for these projects in the rest of Europe, and many banks are not yet ready for those kind of tenors.

?And in addition, bidders are pushing funders to support even longer terms when bidding for longer concessions, such as 40 years or more.? Although the risk is low versus other project financings, for example in the power sector, it will be some time before banks and investors are comfortable with these timeframes.

Adds Mark Elsey, head of the Projects group at Ashurst Morris Crisp: ?In the UK people are now looking at 30 to 35, sometimes even 40 year tenors. But that is principally in the capital markets where they are attracted to long-dated paper. The banks are definitely less keen on the really long tenors, and genuine project finance banks are still only doing around 25 years. If it gets much longer than that, people will start to get uncomfortable.?

He says one change in the financing of road projects is the increased interest of institutional investors. ?You will see more institutions coming on board wanting to take paper, and there are a number of infrastructure funds that have developed that will look at roads, but I think funding will still largely follow the traditional models.?

A28 ? bonds away

One deal that did not follow traditional models was the financing package for the A28 in France, which reached financial close on June 28 this year. The project involves the building, financing, operation and maintenance of the Rouen-Alençon section of the A28 toll road in Northern France. The tender was launched in 1999, and in February 2001 Alis ? a consortium made up of Bouygues Construction, CDC IXIS, SAPN (Société des Autoroutes Paris ? Normandie) and EGIS (an affiliate of HBoS) ? finished negotiations with the French government and won the concession.

The Eu915 million financing package was originally expected to be quite typical ? equity, senior bank debt, a private placement and subsidies. But after significant pressure was brought to bear to reduce subsidies without increasing equity or affecting equity returns, the group had to find a new solution. CDC IXIS came up with the answer ? an innovative package including mezzanine debt and an index-linked bond tied to French inflation. The Eu460 million, three-tranche bond was the first index-linked bond in the eurozone to be issued by a non-sovereign entity.

According to Elsey at Ashurst, the French deal is a foreshadowing of what is to come out of the country. ?Historically the French claimed they invented concessions, but they have never followed the traditional PFI/PPP model. However, lately we have seen a greater willingness to accept privatisation, especially in the areas of roads and infrastructure. There will certainly be more privatising to come,? he says. ?Also they appear to be becoming much more amenable to traditional finance models than they have been in the past, and I believe we are going to see some pretty impressive programs coming out of there. France is really the place to watch.?

Projects hot up across Europe

Next door in Germany, the tolling of heavy trucks is set to begin on some routes in 2003, although Elsey says it is unclear how that will proceed. ?On certain motorways they have changed the law to allow tolls for heavy goods vehicles, but how the funds go from the driver that pays to the financing vehicle isn't entirely clear. Also, they are not tolling cars so the amount of funds coming in is not appreciable, and given that they don't have much money allotted for the project it remains to be seen how it is going to be funded.?

In the south, the SCUT projects in Portugal continue with the latest deal, an Eu842 million shadow toll road in Porto, signed in September. The financing on the 30-year concession includes Eu358 million from the banks, Eu300 million from the European Investment Bank, Eu110 million cash flow for construction and Eu74.5 million in equity.

In Italy, the long-promised and much needed PPP program is finally under way, with the launch in early November of a tender for the 64km Pedemontana Veneta toll road project, a 10-year build-operate-transfer concession that is expected to be awarded next May. Three other road projects were also approved on October 31 by the Italian Committee for Economic Planning (CIPE) ? the Salerno-Reggio Calabria highway, the Mestre ring road and the Marche-Umbria link. Another area to watch will be to the east, with major projects planned in the Czech Republic and in Poland.

After a lot of talk, little concrete has yet developed in The Netherlands or Greece. In Spain, projects continue. Says Elsey: ?Spain manages to have very tightly financed roads on the basis that think they are implicitly government backed. I think that is going to have to change, but when and whether they will realise that they are, in fact, not truly backed by the government, I don't know.?

Elsey believes that growth in the toll road sect