The Portuguese infrastructure market has proved remarkably resilient in the face of market turbulence. "Portugal has been exceptionally healthy; each of the road, hospital and rail sectors has experienced deal signings over the last 18 months or is about to, with each adapting successfully to market conditions," says Sergio Monteiro head of acquisitions and project finance at CaixaBI.

The six road projects signed and financed under the new road programme involved heavy participation from the EIB, including its new subordinated debt guarantee, the LGTT. The financing of Braga hospital was adapted with availability payments resculpted to the front end of the concession so that a fully amortizing debt structure could be supported. And the high speed rail model passes interest rate risk onto procurer RAVE at year five and will include a government guarantee for EIB facilities.

Court conundrum

By far the biggest talking point in the market is the refusal of the Accounts Court (Tribunal de Contas) to grant approvals (visto previo) to five of the six financed road projects in the new programme. "The main reason the projects were rejected was because the BAFO was worse than the initial proposal, and that was not allowed under the terms of the tender documentation," says Margarida Olazabal Cabral, partner at Morais Leitao Galvao Teles Soares da Silva.

The impasse seems to have been breached however, with the court agreeing to Estradas de Portugal's (EP) fix on the Douro Interior concession whereby the availability payments are lowered but are made good by a compensation payment, and 100% of the refinancing upside is captured by EP. The banks have agreed to the compensation plan for Douro Interior as the compensation payments are small compared to the availability payments – because the capex inflation between indicative bids and BAFOs was relatively small. The reduced availability payments are still sufficient to service the debt, the ADSCR falls to 1.10x on Douro Interior above the 1.05x default trigger.

Under EP's proposed solution the reduced availability payments are still sufficient to service the debt of Soares da Costa/FCC's Transmontana and Dragados/Edifer's Baixo Alentejo. However the reduced availability payments would not cover the debt service of the three other concessions, because of large capex inflation between the bid stages, and will therefore require more detailed negotiations and possibly a different solution. Those affected are: Dragados/Edifer's Algarve Litoral, Brisa's Litoral Oeste and Baixo Tejo.

An irony of the road malaise is that at the beginning of the roads program the perceived major hurdle was the unusual status of EP and its effect on creditworthiness and liquidity – EP is a wholly owned state company without a guarantee, and as such could theoretically go insolvent or be privatised. EP's uncertain status was thought to be the key reason why many international banks stayed away from the program. However, the program has overcome liquidity constraints only to fall victim to EP's own perception of its status as a quasi-private company and its legal standing in relation to the Accounts Court.

"Sponsors are changing their business models and banks are reviewing how they are looking at projects," says Tiago Alves Caseiro at Ascendi/Mota-Engil. "The cost of capital has increased for both sponsors and banks, and huge efforts have been made to get these projects financed, with sponsors keeping their IRRs broadly the same."

Following the Accounts Court spat and pressure on the public purse, EP has withdrawn plans to extend the road programme leaving three outstanding roads to finance. The four earmarked road concessions postponed are Ribatejo, Vouga, Tejo International and Serra de Estrela.

The three roads left to finance are Mota's Eu1.2 billion ($1.6 billion) Pinhal Interior concession, the Eu1.5 billion AE Centro concession that is likely to be awarded to Mota/ Iridium/Dragados/MSF/Lena/BES, and the Eu230 million Rota Oeste highway project.

The Rota Oeste highway was directly procured by the Mafra municipality, which raised around Eu200 million debt for the project. However the highway has now been transferred to EP. Bidding documents have been issued and indicative bids are expected sometime in June. Financial close is scheduled before the end of 2010.

New banks needed

While EP and the courts are progressing towards the granting of visas for the financed but disputed road concession, the Eu1.2 billion financing of Mota's Pinhal Interior concession is progressing well. There are encouraging signs that liquidity is returning to the sector with ten banks lined up to provide Eu900 million of 22-year debt, including one non-Iberian bank, Barclays. The remaining debt will be provided by a direct loan from the EIB. Such was the commercial bank appetite that a planned government guarantee for half the commercial debt was dropped.

In light of the Tribunal de Contas rulings, according to Luis Branco, partner at Morais Leitao Galvao Teles Soares da Silva, a number of changes are likely to Pinhal Interior, AE Centro and Rota Oeste: "We are likely to see no performance of the public agreement before visto is obtained and a termination of the public agreement in case visto is not obtained within a certain period. Support from equity guarantees provided by sponsors will still be needed for liabilities arising out of the performance bond provided under the public agreement and close-out payments under hedging agreements executed at financial close."

All within the market are hoping for a fast and pragmatic solution to the roads problem so that new other banks can be attracted into the market. Cabral at MLGTS, says that despite a technical breach in the law the court should be allowed to issue a visto if the consequences of termination and compensation payments are worse than performance of the contract.

Prior to the dispute, the roads were awarded and financed with equity guarantees allowing drawdown subject to a visto, with EP accepting the risk of costs incurred including swap breakage costs. Ulrich Stark, head of infrastructure at HSH Nordbank asks: "Why can't the public sector take visto risk? Otherwise banks are in an impossible chicken and egg scenario – banks will never commit unless they can set the availability payments and can get hedging in place." The consensus is that the Portuguese government is best placed to take this risk and that a pragmatic, thoughtful process by grantors is best to achieve market confidence.

"Iberian banks are loaded with debt," says Sergio Monteiro. "The key to attracting international banks is keeping the structures short and simple. If risk is allocated correctly and pricing is correct then banks will look at the deals rationally."

Once the Eu1.5 billion AE Centro road concession is financed, EP counterparty risk will not be an issue. For all other projects beyond roads, the state – which is effectively the grantor – does not create the same counterparty problems for international bank credit committees.

"It is essential to try to avoid doing something different," adds Fernando Faria a partner, corporate finance at KPMG. "Portugal is competing with other markets across Europe for bank capital and Portugal needs alternative sources of funding."

At the end of the roads

Beyond roads, a number of hospital deals are progressing towards financial close. Like roads however, a number of the projects are running into NPV problems on their bids – albeit for a different reason. Whereas the road concessions were deemed non-compliant with procurement law by the Accounts Court because the final bid was higher than the indicative bid, many of the bids in the hospital projects have been a large margin over the public sector comparator.

The Eu80 million Vila Franca de Xira hospital – the fourth and final infra-clinico concession in Portugal – has been awarded to the Somague, Edifer and Jose de Mello consortium and is due to close 29 April. The same team won and financed the Eu220 million Braga hospital that closed in February 2009, and upon which the structuring for Vila Franca will be based.
The Somague-led group, backed by CaixaBI, BES and Banif, beat a Ferrovial-SLN consortium backed ING, BBVA and Banco Efisa. Somague/Edifer/Mello was the natural frontrunner for the award given that the clinico investor in the other BAFO bid, SLN, is the holding company of the now nationalized BPN-Banco Portugues de Negocios.

At the PF infra event in Lisbon, Ferial Hamid, senior manager of Banco Efisa (itself a BPN subsidiary) asked would it not be better in Portugal to have a funding competition after the award of the project, as in the UK, rather than divide the bank market into competing consortia? Otherwise the current process runs the risk of losing a good technical solution that cannot obtain a financing solution.

In response Monteiro says: "I don't think we need to change the model just because of one and a half years of market turbulence. Competition remains healthy. Is it a fair trade for the grantor to meet the extra cost between bid to BAFO when choosing the best technical solution? Maybe, but not in the long term. We haven't seen a requirement to put in firm underwritten commitments, so a well-structured deal can still be sold post award."

The two next infraco-only hospital financings – Todos-os-Santos and Algarve – are facing some delays as they grapple with the thorny issue of the PPP beating the public sector comparator (PSC). According to Faria at KPMG, the Braga hospital financing was able to obtain savings to the PSC of between Eu30-Eu50 million, despite the increase in the weighted cost of capital for sponsors because they were able to sculpt the availability payments, inject more equity and lock in relatively advantageous bank pricing. Purely infraco hospitals will and have struggled to meet their PSC thresholds because the government's PSC has been inflexible to market turbulence: the comparative discount rate for greenfield hospitals is fixed at 6.08% and its compounded by the fact that debt service makes up around 70% of the availability payments.

Anecdotally the PSC is also thought to lag real costs by failing to take into account changes in health and safety legislation which makes construction and operation more expensive.

The EIB is in talks with the Portuguese government to lend into the Eu400 million Todos-os-Santos hospital concession to reduce the costs of the PPP. Two bidders, Somague/ Quadrante advised by KPMG and Soares da Costa/MSF advised by F9, have been formally put through to the best and final offer stage (BAFO), yet both have entered bids above the Ministry of Health's upper NPV threshold.

The NPV threshold had been Eu377 million but was increased by 14% to Eu430 million. Both bidders are still above this higher threshold. It is hoped that the EIB's participation and possibly the use of a government guarantee can lower the cost to within this threshold or the project may have to be re-tendered.

A similar situation is unfolding for Hospital Central do Algarve PPP. Ferrovial posted an indicative bid with an NPV of Eu370 million versus Teixeira Duarte's Eu410 million. Both bids are above the public sector comparator of Eu270 million. Bidders have so far put forward outline technical proposals and will now put forward more detailed plans before a BAFO stage.

High speed ambition

Despite its size and complexity the high speed rail tenders have been bid relatively smoothly. Only 'relatively', because there have been some disquiet among losing and competing bidders about the weightings of the bid evaluations, particularly the relative importance of technical criteria vis-a-vis financial.

The first stretch of the five-legged programme network, PPP1 is close to financial close. Six banks are lining up for the 27-year Eu190 million commercial bank tranche backing the Eu1.45 billion PPP1 Poceirao to Caia high speed rail line in Portugal. The project, sponsored by Brisa/Soares da Costa/ Iridium, had a financial close deadline set by the government of 31 March but this has been extended to 24 April.

The EIB is also expected to contribute Eu600 million to the financing split between a direct loan and a counter-guaranteed tranche. The remaining finance will be met by EU subsidies. In an effort to reduce debt costs RAVE is accepting interest rate risk from year five.

The availability-based 40-year concession comprises construction of 170km of high-speed track and 92km of conventional rail, and will be 75% backed by availability payments from the Portuguese state and 25% by maintenance payments from REFER.

An award has yet to be made for the second stretch the Eu2 billion, PPP2, linking Lisbon and Poceirao. FCC/Eiffage has been made the first ranked bidder with the lowest NPV bid of Eu1.87 billion and together with Mota Engil/ Somague/Sacyr/Teixeira Duarte are through to the best and final offers stage.

Beyond PPP2, the next phases of the network are expected to be bid sequentially. Two along the link from Lisbon to Caia, on the Portuguese border (connecting to Madrid): Lisbon-Poceirao (Eu1.6 billion) and Poceirao-Caia (Eu1.7 billion); and one between Braga and Valenta, on the Portuguese border, connecting to Vigo (Eu800 million).

The sixth tender is for the signaling and telecommunications for the entire high-speed network. RAVE undertook much research into the procurement of the system and found that one signaling concession avoided the integration problems of other rail systems, such as that in the Netherlands. The sixth tender is said to correspond to 5-10% of the total investment (up to Eu900 million).

Airport at last

Rounding out the impressive infrastructure pipeline, the new Lisbon airport tender is moving forward. The Portuguese procuring authority for the airport, NAER, has completed the project environmental impact assessment and is waiting to hear back from the government for clearance to launch the tender. The target is to have a tender out to the market in July 2010. The new airport is now situated at the third site selected since the project was conceived; a military shooting ground East of Lisbon, Campo de Tiro de Alcochete.

The project will have an estimated capex of Eu3.357 billion ($4.54 billion) which includes construction of a 22 million passenger per year terminal, runways, railway connections and the cost of moving the military from the land and other associated infrastructure. NAER is proposing a 40-year concession with an optional 10-year extension. The principal bidding criterion beyond technical considerations is likely to be the state's share of revenues.

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The new procurement law

The new Portuguese procurement law will allow grantors to accept earlier bids, if lower, avoiding the 'BAFO inflation' issue that has dogged the new road programme, but it could introduce more complications to tenders, according to Luis Branco and Margarida Olazabal Cabral, partners at Morais Leitao Galvao TelesSoares da Silva.

Under the new law, the decision to have (or not) a negotiation phase, may be taken only after the evaluation of the proposals. "The indicative phase is now the initial phase," says Cabral. "If the BAFO is higher it is excluded, and in that case the grantor can award the initial proposal."

The new procurement law will stop the practice among constructors of entering artificially low bids at the indicative stage, to effectively 'buy a ticket' for the BAFO because they could now be granted the project on those terms. The practical consequences of this change is unknown but it is likely that bid costs will increase, as bidders will need to be more thorough in their capex costing and cost of funding at an earlier stage.

The new procurement law also introduces the European Union concept of competitive dialogue. Competitive dialogue has been used in two small municipality contracts in Portugal but not in big contracts. The theory behind competitive dialogue is well worn – for complex projects the technical needs of the grantor are best met by detailed negotiation with the private sector – but so are the criticisms. To insure against competitive advantage, competing parties must get a fair chance of dialogue. "In Portugal, this could last forever," says Luis Branco.