The trans-European transport network (TEN-T) vision is a fully integrated transport network across Europe and the European Commission (EC) estimates that Eu400 billion is needed to fulfil this by 2010. As governments across the continent struggle with budgetary constraints, private sector money is likely to play an increasing role. The potential deal flow is enough to keep project financiers busy. The typically large size and cross-border nature of these projects, however, means that the structure of each must be analysed separately and carefully.

As with its counterparts in the telecommunications and energy industry, TEN-T was an idea born at the end of the 1980s. Talk of a single market was picking up and links between countries needed to improve in order for goods, people and services to move around freely. In July 1996 the European Parliament and Council adopted Decision No 1692/96/EC on Community guidelines and the initiative was born.

The full design demands 70,000km of railways, including 22,000km of new and upgraded track for High Speed Trains, 15 000km of new roads, nearly half in regions on the outskirts of the Union, combined transport corridors and terminals, 267 airports of common interest and networks of inland waterways and sea ports.

The EC identifies the links but the actual projects are progressed by the host governments. It is they that choose the procurement method. Cross border links can be complex, with lengthy negotiations, as more than one government has to agree on how to proceed. All projects are eligible for a whole range of European community funds and loans. The EIB, which specialises in long-term funding, has loaned money to every project so far.

?The EIB played an important role in helping to achieve value for money on the High Speed Rail Link (HSL) Zuid project in the Netherlands,? says Hans Classen, transport finance, ING. ?Its presence improves tenor and pricing.? The EIB put up a Eu400 million tranche for consortium Infraspeed to construct and operate the link between Amsterdam and the Belgian border. The loan is guaranteed by commercial banks during construction but has a very positive release mechanism.

The EU has a TEN-T budget of over Eu500 million to be dispersed in grants every year as well as regional and cohesion funds that can be tapped for co-financing. At the moment, EU grants can only amount to 10% of the project costs, including studies. However, a proposal has been put forward that this should be raised to 20% in some cases, particularly cross border rail projects in which costs can run very high.

Incorporated in the initial guidelines was a list of fourteen so-called priority projects, identified by the Essen European Council in 1994 as being of particular importance. These included the Est-Europe high speed rail line and HSL Zuid in the Netherlands, which both raised finance in 2001. Of the fourteen, ten are at least partially completed, three are under construction and only the France-Italy, Lyon-Turin high-speed train and combined transport project has yet to get off the ground. A consortium of Credit Agricole, SG and IntesaBCI is advising on possible funding routes.

In a 2001 amendment to the guidelines a further six projects were proposed as priorities. Unlike its predecessor, this list included a project based outside the EU, the Eastern European high-speed train/combined transport system. It also includes the Galileo satellite-based positioning system. (See box.)

Whose budget is it anyway?

The majority of TEN-T projects to date, priority or otherwise, have been funded on the back of public money supplemented by available community funds. There have been some high profile exceptions, notably HSL Zuid and the A28 of 2002, but in general, many governments regard infrastructure finance as in the public domain. Word is, however, that this is changing. ?Many governments are looking very closely at their ability to raise money and inevitably turn to private sector participation to get deals done,? says, Robert Baines, consultant, Standard & Poor's. ?In some countries they are looking to build on the experience in the UK.?

Mike Wilkins, director, infrastructure finance ratings, Standard & Poor's adds that, ?Europe is quite different to the US, where public bodies can raise money easily by issuing bonds. This is partly a cultural difference and partly because some European countries do not have the legislation facilitating public sector access to the capital markets.? The EIB and EU are encouraging Public Private Partnerships (PPP) as a way to stretch out project costs to the private sector over a long period of time. The multilaterals may lay out some conditions that must be fulfilled in return for certain funding but ultimately the route is decided by individual governments. Any multilateral terms are generally geared towards encouraging standardisation across countries.

PPP is defined as any project structure that involves both the state and private companies. This can range from the BOT concession form seen in HSL Zuid to the Sweden ? Denmark high speed rail link, which is operated by a private company but owned by the state. ?It is possible we could see a model where the project company is a joint venture between public and private bodies,? says Pedro Michelana, head of project finance, BBVA. BBVA, jointly with Credit Lyonnais, is advising the Bouygues/Dragados consortium that has recently been awarded preferred bidder status for an HSL project running between Perpignan (France) and Figueras (Italy).

With PPP on the rise, developers and financiers on the lookout for projects may look to the TEN-T. As large and capital intensive infrastructure projects, they lean towards project finance well. They are also generally attractive to status-conscious lenders because they are high profile, large projects. However, each project has to be analysed carefully. Just because it has been endorsed by the EU, a TEN-T project is not necessarily a safe investment.

?We are following the TEN-T projects quite carefully,? says a Dragados spokesperson involved in the Franco-Italian HSL project. ?But it is difficult to generalise. It really depends on the country and the project, although they do generally have some features that make them attractive for sponsors.? A Deutsche project finance banker also says, ?From our perspective, we consider transport projects regardless of whether it is TEN-T.? As always, risk allocation is the key for financiers and in countries where PPP is a young concept this is not always straightforward.

The TEN-T status does not guarantee the project a robust structure, then. But what it does do is put pressure on the host government to get the project moving. ?The Paris-Strasbourg rail link may not have got off the ground if it hadn't been a TEN-T project,? says Henry Mary-Gauque, director of communications, EIB. ?Profitability is quite low so it is being funded 55% by public resources.? TEN-T is a political label and governments are put under pressure to do what they can to ensure the projects are successful.

As with Paris-Strasbourg, this often boils down to a public cash injection. The A28 in France was privately financed, but cushioned by a significant grant from the government. The Franco-Spanish HSL is also expected to receive a boost. It is generally understood that the need for these subsidies is simply inherent to projects of such large scale, particularly high speed rail links, rather than a notion, misplaced or otherwise, on the part of central European bodies of whether projects are necessary. ?Toll roads can be purely commercial,? says Pedro Michelana. ?But high speed rail is more likely to need assistance.? Robert Baines at S&P agrees with this and emphasises that, ?the strength of the TEN-T projects is that they are natural trade corridors. Having designed the blue print for the projects, each highway falls into place quite easily.?

In the absence of subsidies on privately funded projects, comfort is likely to be drawn from a shadow, rather than real toll, payment mechanism. This is the case on the HSL Zuid. The Dutch government will pay the Infraspeed consortium for the new link in monthly instalments based on the railway's performance and availability. A separate train operating company (TOC) appointed by the state will run train services.

Bank appetite for well structured transport deals in general is quite good but the general approach is that, ?it is impossible to read across projects.? Banks bid very aggressively on HSL Zuid and it ended up with very tight pricing, some say too tight for refinancing. But this will not become a benchmark for TEN-T projects. This deal was viewed by most involved as a precedent for Dutch PPP, for which it was a first, rather than TEN-T. The Dutch government, which does not have the budgetary constraints driving PPP programs in other European countries, was under particular pressure to ensure that the transaction represented real value for money.

The emergence of project bonds in Europe is increasingly providing an alternative source of funds. July 2002 saw the first ever index-linked euro bond successfully sold down into the capital markets. Eu460 million was raised to fund the build out of the A28 toll road. Participants in the deal cite a number of attributes that made this deal suitable for pioneering a new route; long concession period, proven traffic flow on linking roads, history of tolling in France. This notwithstanding, the transaction highlights an important new option when considering funding routes. Nick Williams, partner Allen & Overy confirms ?Bonds are very much part of the armoury of financing options available to project sponsors. We will see more use of them, but it will depend on the particular project. We will see them (and already are seeing them) not only in refinancings but also in greenfield projects.?

Road to the east

An important part of the TEN-T plan, as laid out by the EU, is development of infrastructure to and within non-member countries. Infrastructure is in great demand and, particularly in the case of accession countries, the EU is keen to improve it. Given that government money is likely to be tighter in these countries than most, third-party debt will be needed to fill the gap. But attracting funds in a climate with little history private of financing and uncertain government commitment, is not easy. ?We were following projects in Romania and Bulgaria but the governments don't seem to have a clear framework,? says one sponsor.

Increased support from EIB, EBRD and other community bodies is one way to address concerns, although the Czech Republic's D47 appears to be proving that it is possible even without this. The country's first privately financed toll road (although not a TEN-T) is raising roughly Eu1.3 billion of entirely commercial debt in a combination of bank and bond funds.

There are certainly a lot of potential opportunities coming out of the region if projects can be made viable. Marcus Kliener, head of transport finance, HypoVereinsbank, says, ?Opportunities will come in central and eastern Europe. It is just not moving as fast as people hoped.? He points to Croatia as an example where the government is progressing privately-owned transport projects well. The Bina Estrai toll road was originally financed with ECA-backed bank debt but now, following construction completion, is looking to refinance on a purely commercial basis. The project is a shadow toll with a real tolled tunnel and HypoVereinsbank was one of the lenders on the original financing.

Robert Baines agrees that there are likely to be increasing opportunities in the region, saying, ?There are a lot of things going on in Central and Eastern Europe, but there are also problems. Many projects can't operate on a purely commercial basis so a package needs to be found and this will vary from project to project.? He adds that there is often a threshold, after which car ownership takes off. If this is nearing in some countries, then opportunities for transport infrastructure will take off. The private sector could actually move in and create its own opportunities within this.