Poland generally has a poor reputation in the infrastructure finance market. Political and financial wrangling hampered the procurement of some of the A1 and A2 road sections. The country’s administrations have demonstrated tepid enthusiasm for PPP, and delays to procurement processes have been common.

One reason for this ambivalence is the availability of EU funding as an alternative to PPP, but this is gradually expected to become much less plentiful. Poland’s present administration hopes that a slate of rail projects, which will be procured under a different law to road assets, a resurgence in interest at the subsovereign level, and the passage of new legislation will mark a fresh start.

Market participants have complained about the complexity of applying Poland’s PPP laws, the inflexibility of the first PPP Law, the need to gain an approval from the Minister of Finance for projects of larger than Eu100 million ($140 million). Given the number of hurdles, the risks of a deal failing through – or falling victim to criticism about whether PPPs are a waste of public money – are high. Public bodies are perceived to lack experience and knowledge about how to structure and manage PPP projects.

Banks are not blameless for the country’s mixed record. The most recent A1 section was abandoned after the post-crunch banking market decided that volume risk – even as represented by shadow tolls – was too hot to handle. Jonathan Simpson, head of European projects and a finance partner at Paul Hastings, says the banks’ reluctance to accept volume risk has been caused by their recent bad experiences with similar types of deals. “It is also due to the lack of liquidity in commercial banks, which has made credit scarce and expensive”, he says.

A tangled history

Cintra had signed a concession agreement with the Polish government in January 2009 to build, design, operate and finance three sections of the A1 between the cities of Strykow and Pyrzowice, with a total length of 180km. The required investment for the 35-year concession was estimated to be about Eu2.1 billion, and Cintra’s Autostrada Puludnie consortium was given a year to close its financing. Budimex, which was to own 5.05% of the project to Cintra/ Ferrovial’s 94.95%, was confident that they would close. A year later, and 15 months from Lehman’s collapse, in January 2010, the contract was cancelled.

Successive governments have made the modernisation of Poland’s roads a priority, and the coming Euro 2012 football championships have provided some additional impetus, but political and financial issues have often blocked its progress.

A concession agreement for a section of the A2 between Konin and Nowy Tomysl was signed in 1997 and the concession reached financial close in 2000. It was built by AWSA. The same concessionaire signed an agreement for another section of A2 – 105.9 km –?Swiecko-Nowy Tomysl worth Eu1.3 billion, and reached financial close in June 2009.

Another 18.3km section of the A1, running through Silesia between Swierklany and Gorzyczki on Poland’s southern border with the Czech Republic, has had an even more tortuous history. In December 2009 the Polish government cancelled the Eu140 million contract for the road with FCC subsidiary Alpine Bau, saying that progress on constructing this section was unacceptably slow and solicited new bids. Alpine Bau, which had complained that one of the section’s 32 bridges could not be built to original specifications, won the new tender, saying that the new tender was feasible, unlike the old one.

While each cancellation constitutes a dent in foreign investors’ confidence in the Polish government, most industry commentators say that it is still early in PPP’s life in Poland, though there are some lessons that can be learnt from the undertakings of the A1 and A2 road projects. “The track record of PPP projects is still rather limited, with only a couple of motorway concessions granted over the last couple of years”, says Agnieszka Gajewska, the chief executive of advisory firm Infralian: “The key success factor from past PPP transactions is that the governments’ goals must be based on a thorough understanding of the market.” Infrastructure investors, says Gajewska, like to have a certain level of continuity and the adoption of a long-term approach, and “only in this way, can the cost to the public sector be justified by bringing sustainable benefits.”

One generous interpretation of the roads programme’s legacy is that it served as an example to other public authorities looking at PPP structures. Maciej Jurewicz, a project manager at Investment Support, another local consulting firm, says that the road projects in Poland have enabled the city councils to learn that they can “deal with public investments quicker if you are co-operating with the private sector, and this allows the infrastructure to be delivered more cheaply and quicker.”

Tomasz Lisiecki, country manager for Poland at Trigranit, which has won the Poznan railway station and environs modernisation project, says that Poland has behaved like a laggard. According to Lisiecki, the law allowed too many not-in-my-back-yard complaints. These initially blocked developers from starting construction for long periods, though the law has since changed, he adds, and the process has become much simpler and quicker.

Few observers doubt the government’s sincerity, though some worry that the PPP process is not transparent enough to endure over successive administrations. Marian Moszoro of the IESE Business School points out that most roads take 4-8 years from the beginning of the tender to the day that the motorway or trunk road is opened. “They all had ambitious plans, but then the projects eluded them in terms of their complexity”, he argues.

The backdrop to resurgence

There have been multiple amendments to Poland’s Procurement law, PPP law, Construction Works and Services Concessions act, the PKP act, the Railway Transport act and the Motorways and Roads Fund act over the last 14 years. These have encouraged city councils to show more interest in PPP for local education, housing, sewerage and water, and transit assets. Potential projects include the modernisation of some railway stations like the ones at Sopot and Warsaw West.

Given that 38 PPP projects were put forward during the first half of 2010 some analysts have suggested that a recent amendment is responsible, though none of the 38 have actually reached the procurement stage. The amendment occurred between January and February 2010, and removed a concessionaire’s right to challenge and protest repetitively about any procuring authority’s decision about a specific project.

“The current law allows the investor and the public sector organisation to agree upon the issues relating to the project between them, allowing the risks to be shared more easily than the previous laws permitted,” says Bank Gospodarstwa Krajowego’s head of public sector structured finance and advisory, Jan Dziekanski. He adds that he has not yet seen any large- or medium-sized deals (above roughly Eu30 million) based on the new laws. Another source familiar with the market disagreed with this view, arguing that the “previous law allowed parties to come to an agreement upon various issues to gain the outcome in a way they each wanted.”

The legislation in any case still has to be tried and tested, though there are 200 identified potential PPP transactions in the pipeline. The new laws should provide increasingly debt-laden local governments with more control over local PPP projects.

Concern over central government debt levels may also encourage PPPs for projects of national importance. The Public Finance Act states that public debt cannot exceed 60% of public debt to GDP, and it has in recent times reached levels of up to 55%.

Railways: The neglected children

While the rehabilitation of Poland’s roads has been a priority since the mid-1990s, the railways were neglected. Poland requires the renovation of a number of railway stations, the replacement of outdated rolling stock and the improvement of railway lines. Polish National Railways, PKP, and its track maintenance subsidiary PKP PLK, manage and own most of these, although 50% of the local operations have been taken over by local governments.

“We estimate that the capital investment backlog in railway infrastructure is about Zl30 billion, with as much as one-third needed in a very short period of time. It’s logical, if public funds’ constraints are taken into account over the next couple of years, that finance should be sought from multiple sources, including EU funds, multilaterals, central and local governments, PKP itself as well as private investors” says Infralian’s Gajewska.

PKP plans to build a Y-shaped high-speed rail line, at a cost of Eu6.5 billion, which will link the cities of Warsaw and Lodz, with branch lines going to Wroclaw and Poznan. In April 2009 four bidders qualified for the second stage of the tender for the line’s rolling stock after the completion of a feasibility study that attracted Eu80 million in European Union funding. In the end just one bidder – Alstom – submitted a proposal to supply 20 sets, and these will not be ready in time for the Euro 2012 tournament. By 2012 the Warsaw-Krakow-Katowice and Warsaw-Gdansk lines should have been upgraded to allow for train speeds of up to 200kmh.

“The European Investment Bank is financing many Polish road development projects, and we’d like to balance this with investment in rail”, says Maja Roginska at the EIB. Talks are in progress regarding potential financing for the high-speed trains, but to date rail financings in Poland have required state guarantees, though a PPP-style financing based on long-term public service contracts might be feasible.

According to Adrian Furgalski, a director at Transport Consultants, there are also 77 railway station modernisation projects at various stages of either development, financing or tendering. Yet PKP owns 1,010 active stations, and only 3-4 of these are considered to be true PPP projects, such as one at Sopot, where the city council has bought the land from PKP upon which the station and associated commercial space is built. PKP is given ownership and control of the railway station. Katowice and Poznan are also in line for large-scale redevelopments, and what all three have in common is that they are missing out on EU funding.

PKP disdains the PPP label

PKP operates as a private company, although its privatisation has been stalled, and the Polish state currently owns a 100% stake. Since PKP and not the Polish state is responsible for managing the company’s large debt burden, its procurements are not technically dubbed PPPs. They certainly have few similarities with the last round of road deals. For instance, the development of the commercial space surrounding stations opens up new opportunities to generate income.

“The Katowice and Poznan projects are purely commercial projects whereby PKP and a private investor establish an SPV”, says PKP Group spokesperson Lukasz Kurpiewski. PKP maintains ownership of the land, and the investor builds new railway stations. This includes the land upon which commercial or services facilities such as shopping centres, cinemas, car parks, hotels and offices are built. So with Poznan, for example, the PPP laws don’t apply, but the city council will be responsible for managing issues like accessibility to the station.

Most of the construction and operating risks of the three projects are transferred to the private partner, though demand and availability risks are likely to be very low. IESE’s Moszoro therefore predicts that the returns on equity will be in the region of 12-18%. This is in stark contrast to the road projects, where demand and availability risks can potentially be high and less predictable.

Katowice, at Eu240 million, is the largest of the three and involves 50,000 square metres of office and retail space on top of the station development. PKP and Spanish developer Neinver have formed Galeria Katowicka to build and operate the project, with Neinver providing equity and taking responsibility for finding construction debt. The financing is more likely to look like that for a real estate asset, with lenders exposed to the building’s rental performance, and the sale of land for redevelopment.

Lisiecki, Trigranit’s country manager, describes the Eu170 million Poznan railway station project as being a PPP project that’s not subject to PPP legislation. His definition seems nevertheless rather broad. “Two partners bring something together in order to develop a train station and a shopping centre.” According to Lisiecki, a third-party financial institution will finance about 60-70% of the project, with Trigranit providing the rest as equity, but no agreements are currently in place at the moment. Trigranit is speaking to “the usual vendors within the region”. The plan is to have some loan agreements in place by the end of November 2010. Other than providing the land, PKP provides assistance with any railway-related issues that arise: e.g. the coordination of work and train diversions. Trigranit is responsible for the design, construction, financing, operations and the eventual sale of the SPV.

How the debt is going to be structured is still under negotiation, but the covenants would be very familiar to a real estate lender, if not a project finance lender: timely construction, progress in leasing, and maintaining a proper loan to value ratio by ensuring that the tenants pay their rent and the correct management of the property. The construction financing for a project like this one usually has a 2-3 year tenor, and the long-term debt one of 5-7 years, though a sale of the asset before the loan’s maturity would be typical. “These days lenders require a coverage ratio of 1.3x, and they require higher levels of preleasing. Not so long ago you could draw on a loan of 20-25% for presales and pre-letting, but this has since doubled. A drop in real estate prices represents another potential risk.”

The total budget for Sopot, the third of the likely privately-financed station deals, is estimated at Zl260 million (Eu65 million), of which financing costs account for Zl12.2 million and preparation costs another Zl9.9 million. Investment Support forecasts that in its first year of operating, the revenue from this project will bring in Zl2.2 million. The project includes the construction of surface and underground car parks, modernisation of the road traffic system by building two roundabouts, the building of the railway station to act as a city landmark, the redevelopment of the area around the underground car park, the building of a hotel and six other buildings for urban retail and services.

The project, like the other two stations, is being completed under the Concessions Act and the PPP act and the tender has been announced in the Official Journal of the European Union – its first stage. On 9 September 2010 Warsaw-based Baltic Investment Group and Global Retail and Residential Estate Services submitted bids – the second stage – and PKP and the Municipality of Sopot will assess the applications – the third stage – before asking bidders to negotiate.

Negotiations form stage four and are expected to last 4 months. Subsequent stages, of which there appear to be eight in total, deal with such aspects as drafting the partnership terms, requests for proposals, the assessment of the proposals, the selection of the best proposal, submission of fulfilment of requirements documents by the contractor, the execution of the agreement and if need be dealing with any complaints are filed at the Provincial Administrative Court.

The private partners will be expected to pay the city council a specific amount in cash, carry out the construction works and transfer the ownership title of the railway station with a share in the jointly held estate. Post-construction the railway station will be separated from the rest of the estate and commercial facilities will become the property of the private investor. There will also be a statutory guarantee period of 3 years.

This time with feeling

Some market participants are not sure that PKP is easy to work with. One said that this may be because PKP is trying out different types of PPP structures to find out what works best. This leaves private bidders uncertain as to what the long-term opportunities are in the sector. The station projects, with their real estate development potential, should nevertheless prove attractive, even if they offer few lessons for local authorities procuring other types of assets.

Polish railway infrastructure needs reach far beyond railway stations, however, though they would certainly offer great macroeconomic and social benefits. “Spain, the country of comparable size and population, is aiming at the high-speed train network which will enable 90% of its population to live less than 50km from a high-speed rail station by 2020,” notes Infralian’s Gajewska. “The first Polish project, a connection between Lodz and Warsaw, is set to start in 3 years’ time. It demonstrates the amount of work that needs to be done and the extent of finance that needs to be raised.”