Grecian Earner?
Being the most geographically isolated member of the EU is not easy
? just ask the Greeks. Decrepit transport links, both domestically
and with the rest of Europe, have aggravated an enduring trade
deficit. The government has set about passionately nurturing a PPP
infrastructure framework, in part to change all this. But if Greece
is to be seen as a modern European state, it will have to deliver.
Parallels with Portugal are plain. That country's toll road scheme, despite its delays (and contentious bidding process), has seen through some landmark financings, having cut currency exchange risk out of the picture since its euro approval. Greece is now on that same footing. The republic's recent landing in the eurozone has urged much optimism for what will be the most crucial determinant of the scheme's success ? international lender support.
A local banker highlights the similarity thus: ?As with Portugal, there's no way at all that sufficient local currency would have been available to fund these projects. Joining the euro will prove to be a major boon for Greek projects.?
EIB involvement in financing Portuguese infrastructure deals has been considerable. And this is likely to continue to be the case for Greece as well. The new Athens airport, a ring-road around Athens and a suspension bridge across the Gulf of Corinth, currently under construction in partnership with the private sector, were successfully backed by large, soft-loan facilities from the EIB.
The demand for new infrastructure in Greece runs deep. The existing transport system is insufficient to cope with the needs of the modern state. To combat this, more than a quarter of all expenditure under the EU's second Community Support Framework (CSF II) was earmarked for transport. And some 36% of funds (a total of $37.5 billion) available under CSF III have been tagged for infrastructure, primarily highways, the rail network and improved sea and airports.
But with Athens set to host the 2004 Olympic Games, improving transport and other infrastructure has become top priority. The country hopes to use the Olympics to revolutionize its transport network ? if it can get it done in time.
The program
Now Greece, much like Ireland, is swinging itself into position, in anticipation of the first of its new toll highway schemes rolling out to market. This is some way off yet. But if initial feedback is anything to go by, the market is eager for Greek deals.
The tenders fall into two discrete sets, each consisting of three separate projects. The first wave of tenders, launched last Christmas, consists of the following: the 230km Maliakos-Kleidi highway, with an approximate price-tag of Eu571 million; the Athens-Corinth-Patra-Pygros-Tsakona highway which will run 360km and cost Eu1.3 billion; and the 196km Central Greece Motorway, estimated to cost Eu1.1 billion.
?There is a fantastic amount of interest from international developers, with some 58 sponsors joining the various bidding consortia for the first set of road tenders ? that, in my view suggests a very encouraging start,? observes Nigel Purse, project financier at Espirito Santo Investment.
Sponsors expressing interest included Agricultural Bank, Avax, Hellenic Technodomiki, AEGEK, Technical Olympic, Proodeftiki, General Construction and Sarantopoulos. Among the foreign companies involved in the total of 19 bidding consortia are Hochtief, Philipp Holzmann, Grupo Dragados, Cintra, Agroman, Egis, Bouyges, Vinci and Somague. Tender procedures, which include drafting a shortlist followed by detailed discussion with each bidder before final bid submission, will likely take 18 months to conclude.
An encouraging start, maybe. But the question is whether there will also be a successful and (with the imminence of the Olympics) timely finish. ?It's really too early to say with any accuracy, but I'd caution against disparaging the efforts to date. It's very easy to harp on about the slightest delay in what is fundamentally a complex process, but this kind of talk often misses the point,? argues an adviser familiar with the process.
The point is that, as Purse also points, the PPP deal market is limited, and there is certainly appetite for such transactions. In short, banks don't make money unless they make deals. And Greece, like Portugal and Ireland, has the potential dealflow for just that to happen.
The recently launched second set of tenders in the national highways program are for three separate schemes: the North Western Axis/Athens-Maliakos/Schimitari-Chalkis triple road project, comprising 177km of new road, 388km of operation, and an cost of Eu1.15billion; the Corinth-Tripolis-Kalamata/Lefktro-Sparti double road project, calling for 81km of new construction, 193km of operation, and Eu403million; and urban roads in the Attica region requiring 36km of new build, 47km of operation and a price-tag of Eu400 million. Initial expressions of interest are due to be returned soon.
A new approach
The government, it seems, is persisting with a newfound pragmatism. This latest attitude is best exemplified by efforts to revamp the framework for the country's road concession deals.
Previous projects were ratified by parliament under a public concessions law ? before talk of financing. In practice, then, bankers entered deals after all the terms of the concession framework had been written. The problem with such a procedure is ensuring bankability. For example, financing for the Athens ring road was arranged after the concession contract was signed, adding two years to the deal time. The Thessaloniki metro project, currently awaiting financial close, is also subject to the old framework, resulting in what some describe as a long-winded process to patch up unwieldy contracts.
But the case for fundamental procedural reform has been made ? and, it seems, accepted.
Partnering with the private sector is Greece's only solution ? if it wants to secure enough cash to get its projects rolling forward on time. And bringing internationally digestible standards to bear is the only viable approach. Accordingly, the new line of attack aims to bring in financiers at an early stage, to ensure bankable concession contracts which conform to international legal frameworks ? before ratification by parliament.
?The tender process we have designed will be very clear with a rigorous timetable; concurrently, we're creating umbrella legislation to facilitate the process,? says Tim Treharne, head of infrastructure at Bank of America, who is advising the government on the road schemes. ?Our goal is to issue documents that are cost-efficient and financeable, more consistent with the process in Canada or Australia.?
But some remain skeptical about the actual efficacy of such amendments. Says one multilateral adviser, ?effort is being made to draft this law without the clear identification of the objectives of this exercise ? this process has been for the time being effectively put on hold for the Greeks to clarify their thinking on what needs to be pursued.? Adds the adviser, ?what is really, and more fundamentally, needed are the administrative capabilities to manage PPPs ? something along the lines of the UK's Treasury Taskforce.?
In other words, a mechanism where key teams with relevant project finance experience can guide the process to swift and successful conclusion. ?This is the key element that's missing right now.? Most recently Ireland successfully built a PPP unit into its Department of Finance, precisely to ensure a consistent approach to PPP across the board. ?There is no reason why Greece shouldn't do the same,? he says.
Another case often cited by skeptics and detractors is the Maliakos Tunnel project. Earlier this year the government reneged on its plans to pursue the scheme project. At the time, the decision (which came after years of intense negotiation) was described by some as having undermined the government's credibility. But contrary to this interpretation, says a banker familiar with the scheme, ?the market should see this as a positive thing. The decision was made out of economic expediency, and it stands to reason.? Indeed, the project was toppled in favor of the Central Greece Highway project, one of the six currently being tendered
Rough road?
Nevertheless, for PPPs to make their hit, more needs to change. For instance, Greek law needs to be fine-tuned to adapt to standard project finance principles. As it stands, it is neither clear nor overly project friendly. In particular, security needs to be provided for more clearly. This, as well as pertinent tax issues, is to be dealt with by impending legislation.
But other practical issues facing the current batch of road schemes, and the proper assessment of the market's attitude to commercial issues and appetite for risk transfers, will only really emerge through the barometer of actual market reaction. Progress can be made to limit digression, however.
A primary difference between the Portuguese and Greek approaches is the issue of tolling mechanism: the former deployed an innovative shadow toll scheme whereas the latter is pushing for largely hard tolls on its roads, calling for a different payment mechanism. But for the tolling regime to work, a coordinated and consistent national approach to determining the level of the toll for individual schemes needs to be effected.
Forecasting potential revenue from toll collection is, of course, pivotal. And substantial preliminary work remains to be done. But to mitigate risk effectively and to provide value for money, optimal risk transfer will prove key. Deciding the right share of risk and reward between the state and the private consortia is precisely the main challenge in PPP deals. The urgency remains to get the public sector to think about how to do deals, and about how to understand, take and transfer risk.
As a banker says: ?Most of the second basket of deals are insufficiently defined. We have to be realistic about this. Without the appropriate technical and traffic studies, you don't have a project,?
Another feature on which the analogy with Portugal breaks down is the strength of the domestic banking sector. The local banking base is comparatively thin in Greece, both in terms of capacity limits and maturity. ?The risk appetite is just not there among the domestics, so there'll need to be a considerable amount of international banking support,? notes Purse.
One way to get that support is to harness sufficient state backing. Although the goal of the PPP approach is to relieve pressure on public finances, state support will still be necessary for the projects going forward. Its extent, some argue, may be the thorniest issue yet for the schemes.
EIB support also will be critical. The bank is being encouraged to play a greater role in preliminary negotiations, thereby signaling an encouraging shift from the earlier approach.
?The most important thing to the EIB in this context is the development of the Greek economy. The current growth levels make us feel more comfortable than in the mid-90's. And we're also seeing a larger number of interested parties,? says the EIB's Emanuel Maroulakis. ?But in order for the EIB to contribute meaningfully to private sector participation in infrastructure development across Europe, we will have to examine new financial approaches, such as taking construction and project risk.?
Other financial innovations may also come to bear, particularly with liquidity concerns. With that in mind, it may not be long before a Greek deal replicates Portugal's recent Algarve deal ? the first long term Euro infrastructure bond to be issued.
But overall, says Treharne, ?there has been a tremendous determination to make these deals happen ? and I'm confident they will happen.?
Parallels with Portugal are plain. That country's toll road scheme, despite its delays (and contentious bidding process), has seen through some landmark financings, having cut currency exchange risk out of the picture since its euro approval. Greece is now on that same footing. The republic's recent landing in the eurozone has urged much optimism for what will be the most crucial determinant of the scheme's success ? international lender support.
A local banker highlights the similarity thus: ?As with Portugal, there's no way at all that sufficient local currency would have been available to fund these projects. Joining the euro will prove to be a major boon for Greek projects.?
EIB involvement in financing Portuguese infrastructure deals has been considerable. And this is likely to continue to be the case for Greece as well. The new Athens airport, a ring-road around Athens and a suspension bridge across the Gulf of Corinth, currently under construction in partnership with the private sector, were successfully backed by large, soft-loan facilities from the EIB.
The demand for new infrastructure in Greece runs deep. The existing transport system is insufficient to cope with the needs of the modern state. To combat this, more than a quarter of all expenditure under the EU's second Community Support Framework (CSF II) was earmarked for transport. And some 36% of funds (a total of $37.5 billion) available under CSF III have been tagged for infrastructure, primarily highways, the rail network and improved sea and airports.
But with Athens set to host the 2004 Olympic Games, improving transport and other infrastructure has become top priority. The country hopes to use the Olympics to revolutionize its transport network ? if it can get it done in time.
The program
Now Greece, much like Ireland, is swinging itself into position, in anticipation of the first of its new toll highway schemes rolling out to market. This is some way off yet. But if initial feedback is anything to go by, the market is eager for Greek deals.
The tenders fall into two discrete sets, each consisting of three separate projects. The first wave of tenders, launched last Christmas, consists of the following: the 230km Maliakos-Kleidi highway, with an approximate price-tag of Eu571 million; the Athens-Corinth-Patra-Pygros-Tsakona highway which will run 360km and cost Eu1.3 billion; and the 196km Central Greece Motorway, estimated to cost Eu1.1 billion.
?There is a fantastic amount of interest from international developers, with some 58 sponsors joining the various bidding consortia for the first set of road tenders ? that, in my view suggests a very encouraging start,? observes Nigel Purse, project financier at Espirito Santo Investment.
Sponsors expressing interest included Agricultural Bank, Avax, Hellenic Technodomiki, AEGEK, Technical Olympic, Proodeftiki, General Construction and Sarantopoulos. Among the foreign companies involved in the total of 19 bidding consortia are Hochtief, Philipp Holzmann, Grupo Dragados, Cintra, Agroman, Egis, Bouyges, Vinci and Somague. Tender procedures, which include drafting a shortlist followed by detailed discussion with each bidder before final bid submission, will likely take 18 months to conclude.
An encouraging start, maybe. But the question is whether there will also be a successful and (with the imminence of the Olympics) timely finish. ?It's really too early to say with any accuracy, but I'd caution against disparaging the efforts to date. It's very easy to harp on about the slightest delay in what is fundamentally a complex process, but this kind of talk often misses the point,? argues an adviser familiar with the process.
The point is that, as Purse also points, the PPP deal market is limited, and there is certainly appetite for such transactions. In short, banks don't make money unless they make deals. And Greece, like Portugal and Ireland, has the potential dealflow for just that to happen.
The recently launched second set of tenders in the national highways program are for three separate schemes: the North Western Axis/Athens-Maliakos/Schimitari-Chalkis triple road project, comprising 177km of new road, 388km of operation, and an cost of Eu1.15billion; the Corinth-Tripolis-Kalamata/Lefktro-Sparti double road project, calling for 81km of new construction, 193km of operation, and Eu403million; and urban roads in the Attica region requiring 36km of new build, 47km of operation and a price-tag of Eu400 million. Initial expressions of interest are due to be returned soon.
A new approach
The government, it seems, is persisting with a newfound pragmatism. This latest attitude is best exemplified by efforts to revamp the framework for the country's road concession deals.
Previous projects were ratified by parliament under a public concessions law ? before talk of financing. In practice, then, bankers entered deals after all the terms of the concession framework had been written. The problem with such a procedure is ensuring bankability. For example, financing for the Athens ring road was arranged after the concession contract was signed, adding two years to the deal time. The Thessaloniki metro project, currently awaiting financial close, is also subject to the old framework, resulting in what some describe as a long-winded process to patch up unwieldy contracts.
But the case for fundamental procedural reform has been made ? and, it seems, accepted.
Partnering with the private sector is Greece's only solution ? if it wants to secure enough cash to get its projects rolling forward on time. And bringing internationally digestible standards to bear is the only viable approach. Accordingly, the new line of attack aims to bring in financiers at an early stage, to ensure bankable concession contracts which conform to international legal frameworks ? before ratification by parliament.
?The tender process we have designed will be very clear with a rigorous timetable; concurrently, we're creating umbrella legislation to facilitate the process,? says Tim Treharne, head of infrastructure at Bank of America, who is advising the government on the road schemes. ?Our goal is to issue documents that are cost-efficient and financeable, more consistent with the process in Canada or Australia.?
But some remain skeptical about the actual efficacy of such amendments. Says one multilateral adviser, ?effort is being made to draft this law without the clear identification of the objectives of this exercise ? this process has been for the time being effectively put on hold for the Greeks to clarify their thinking on what needs to be pursued.? Adds the adviser, ?what is really, and more fundamentally, needed are the administrative capabilities to manage PPPs ? something along the lines of the UK's Treasury Taskforce.?
In other words, a mechanism where key teams with relevant project finance experience can guide the process to swift and successful conclusion. ?This is the key element that's missing right now.? Most recently Ireland successfully built a PPP unit into its Department of Finance, precisely to ensure a consistent approach to PPP across the board. ?There is no reason why Greece shouldn't do the same,? he says.
Another case often cited by skeptics and detractors is the Maliakos Tunnel project. Earlier this year the government reneged on its plans to pursue the scheme project. At the time, the decision (which came after years of intense negotiation) was described by some as having undermined the government's credibility. But contrary to this interpretation, says a banker familiar with the scheme, ?the market should see this as a positive thing. The decision was made out of economic expediency, and it stands to reason.? Indeed, the project was toppled in favor of the Central Greece Highway project, one of the six currently being tendered
Rough road?
Nevertheless, for PPPs to make their hit, more needs to change. For instance, Greek law needs to be fine-tuned to adapt to standard project finance principles. As it stands, it is neither clear nor overly project friendly. In particular, security needs to be provided for more clearly. This, as well as pertinent tax issues, is to be dealt with by impending legislation.
But other practical issues facing the current batch of road schemes, and the proper assessment of the market's attitude to commercial issues and appetite for risk transfers, will only really emerge through the barometer of actual market reaction. Progress can be made to limit digression, however.
A primary difference between the Portuguese and Greek approaches is the issue of tolling mechanism: the former deployed an innovative shadow toll scheme whereas the latter is pushing for largely hard tolls on its roads, calling for a different payment mechanism. But for the tolling regime to work, a coordinated and consistent national approach to determining the level of the toll for individual schemes needs to be effected.
Forecasting potential revenue from toll collection is, of course, pivotal. And substantial preliminary work remains to be done. But to mitigate risk effectively and to provide value for money, optimal risk transfer will prove key. Deciding the right share of risk and reward between the state and the private consortia is precisely the main challenge in PPP deals. The urgency remains to get the public sector to think about how to do deals, and about how to understand, take and transfer risk.
As a banker says: ?Most of the second basket of deals are insufficiently defined. We have to be realistic about this. Without the appropriate technical and traffic studies, you don't have a project,?
Another feature on which the analogy with Portugal breaks down is the strength of the domestic banking sector. The local banking base is comparatively thin in Greece, both in terms of capacity limits and maturity. ?The risk appetite is just not there among the domestics, so there'll need to be a considerable amount of international banking support,? notes Purse.
One way to get that support is to harness sufficient state backing. Although the goal of the PPP approach is to relieve pressure on public finances, state support will still be necessary for the projects going forward. Its extent, some argue, may be the thorniest issue yet for the schemes.
EIB support also will be critical. The bank is being encouraged to play a greater role in preliminary negotiations, thereby signaling an encouraging shift from the earlier approach.
?The most important thing to the EIB in this context is the development of the Greek economy. The current growth levels make us feel more comfortable than in the mid-90's. And we're also seeing a larger number of interested parties,? says the EIB's Emanuel Maroulakis. ?But in order for the EIB to contribute meaningfully to private sector participation in infrastructure development across Europe, we will have to examine new financial approaches, such as taking construction and project risk.?
Other financial innovations may also come to bear, particularly with liquidity concerns. With that in mind, it may not be long before a Greek deal replicates Portugal's recent Algarve deal ? the first long term Euro infrastructure bond to be issued.
But overall, says Treharne, ?there has been a tremendous determination to make these deals happen ? and I'm confident they will happen.?
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