Belgium is gaining momentum in its PPP programme, and has closed nine deals since 2006, with a value of Eu3.66 billion ($5.44 billion), with at least 14 more, worth over Eu2.7 billion, in the pipeline (see tables below). The majority of these are, encouragingly, not too big, usually between Eu75 million and Eu200 million in size. Belgium has achieved this momentum despite being in the throes of a four-year-old political crisis, with its political parties setting a world record for failing to form a central government.

The most recent PPP to close was the Eupen schools concession. The Eu146 million project was awarded to the PPP Schulen Eupen consortium, made up of CFE, SKE Facility Management (a German subsidiary of Vinci) and DIF Infrastructure II. The group was awarded a 25-year design-build-finance-maintain (DBFM) contract agreement for eight schools across three sites in the country’s German-speaking region.

Eupen was relatively straightforward and only took around 10 weeks to go from best and final offer stage to financial close, which observers claim is a sign of growing confidence. Indeed, participants remark that the main hurdle for the project was that the contract was written by a German lawyer, which meant the contract was more akin to the German structure rather than the Dutch model, which Belgian banks are used to.

Even so, this unfamiliar language did not deter the banks. The Eu118 million debt package was provided by BNP Paribas Fortis, KBC, ING and Dexia. It centred on a Eu80 million term loan, with a tenor of 27 years, with a Eu25 million bridge loan and a Eu13 million equity bridge. The Belgian government provided the rest of the funding.

The ease in which Eupen was financed provides an inter­esting contrast to – and new benchmark after – the first edu­ca­tion PPP to close; the mammoth Eu1.5 billion Flemish Schools. The latter was first announced in 2006 and went through various challenges and tenders before finally closing in June 2010. That deal was backed by a Eu700 mil­lion six-year revolving construction facility. Flemish Schools also had a Eu1.5 billion 30-year facility, underwritten by BNP Paribas Fortis but with a Flemish government guarantee.

“The major difference between the two school projects was size,” explains Benoît Theys, project finance director at BNP Paribas Fortis. “Eupen involved developing just seven buildings, while the Flemish schools programme in­volv­ed developing 211.”

Schools in

Eupen is more akin to the UK Buildings for Schools pro­gramme, with the schools choosing, instead, a single stan­dard­ised design contract for all the faci­lities. The Flemish project, how­ever, evolved with a framework agree­ment, without certainty in terms of the number of schools willing to participate or in terms of protection of the private part­ner at a global level. Under the legal framework stemming from 1959, known as the School Pact, all of the individual schools in Belgium retain the power to make their own decisions on an individual basis so schools have the right to abstain. This meant the struc­turing of the two deals was significantly different, as an individual design agree­ment had to be signed with each of Flemish school, which in­creases the length of negotiations before construction can start.

“In comparison, the educational decisions in most of the European countries are taken centrally,” Theys adds. “This created volume risk for the Flemish school programme. However, it seems that the level of responses from the schools is excellent and that the full budgeted programme will be used within the next six years, as scheduled.”

The 300bp pricing on the main tranche of Flemish Schools reflected that risk, despite benefiting from a government guarantee. There were some caveats, such as the option to use the availability fees generated from the earlier projects to fund later construction work. Pricing at Eupen – with fewer contracts, an easy structure, smaller size and direct funding from the Government – was more comfortable, said to be around 100bp lower.

Syndication for both projects went well: Flemish schools was 3.5x oversubscribed while syndication of the debt for Eupen brought in 15 banks, suggesting banks are accepting of the different risk profiles. Indeed, bankers believe that size is less of an issue than complexity when it comes to funding Belgian PPPs.

“The trick is to launch projects to the market which are in line with international standards,” Theys remarks. “If and when the granting authorities can understand the message of simplicity, they can bring very big projects to market.” Charles-Antoine Leunen, a partner at Freshfields Bruckhaus Deringer, claims that combining deal size and complexity – such as on Flemish Schools – remains a unique challenge for Belgian PPPs. As such, more complicated structuring should only be appli­ed to projects of a sufficient size.

Some of the upcoming projects still have more convoluted structures. The Kempen and R4 road projects, for instance, have preferred sponsors in place but Via-Invest, the grantor, is pro­curing separate financing contracts, as a DBM + F structure. Once the pre­ferred bidder is named for the financ­ing contract, the winner then enters into a period of negotiation over the funding with all parties.

Once again, banks have not been deterred. Two financing groups, one comprising Dutch Infrastructure Fund/ING/ KBC/SMBC and the other DG-Infra+/Dexia/BNP Paribas Fortis/NIBC, are bidding for the contracts. So, despite the quirks of the Belgian model, financing is available. “We have found no difficulty in finding banks that are willing to back any of our projects,” comments Henri Witteveen, a director at BAM PPP. “These include the local banks as well as the international banks looking to invest.”

The next wave of PPPs is promising to be straightforward and financeable. The most advanced is the prisons pro­gramme. The Belgian Building Agency chose preferred bid­ders in March for three of its four planned prisons, each with a cost of between Eu40 million and Eu60 million. As a sign of enthusiasm, the Belgian Ministry of Justice is set to tender the country’s largest PPP prison – a Eu300 million facility in Brussels towards the middle of the year. A BAM/ Dexia consortium won two of the current prisons (in Antwerp and Dendermonde) while an Eiffage led-group won the third (in Charleroi). A preferred bidder has yet to be chosen for the fourth project, in Mons.

Crucially, the prison PPP programme is following the Eupen template. The projects will be built using a single design and build contract under a more traditional DBFM structure. The sponsors are working on the financing agree­ments, although sources indicate a traditional non-recourse loan, likely without government guarantees will be the chosen solution. Financial close is scheduled for the middle of the year, once the relevant permits are in place.

Leunen believes that the speed in which the prisons have been tendered is significant. Deals like Flemish Schools and Liefkenshoek took years to close, but the first prison tenders launched in August 2009 and were awarded in March 2011. Leunen is confident that, in light of such deals, PPP could be an integral part of Belgium infrastructure procurement. “The tender procedure was been run very swiftly and in a focused manner,” he notes.

It is tempting, with bank confidence, emerging contractual structure and a healthy pipeline, to suggest that Belgian PPPs are entering a golden era. Challenges remain, however, which cast doubt on the long-term viability of the projects: public sector involvement; legislation; and political instability.

Public sector involvement

Belgian authorities have been integral to the success of PPPs. In addition to direct funding, in April 2009 the Flemish region brought in a special guarantee for refinancing of PPPs, to be provided by its transport arm, De Lijn. It pledged that if a project com­pany cannot close a suitable refinanc­ing, the government would match the original margin plus 25bp. The same mechanism was used to guarantee Flemish schools and Brabo 1. The in­creasing involvement of authorities, how­ever, has raised some issues.

In a recent report, CMS Legal ex­plained that a major concern for public bodies searching for funding for long-term projects is their desire to remove debt generated by a public project from the public balance sheet. Obligations from the Maastricht Treaty estab­lish the criteria for the assets’ classification. “One way of providing alternative finance ... is the creation of joint ventures with private operators who are responsible for providing services in a commercial way. The joint venture must include the adequate transfer of risk and must be in the public interest.”

These joint ventures are on the rise. The Flemish government owns a 25% stake in the Flemish schools special purpose vehicle (SPV) and bodies such as Via-Invest and De Lijn have said they want to take stakes in PPP SPVs. In the case of Via-Invest, its owners are the local PPP taskforce PMV (51%) and the Flemish Region (49%). So far the company has only taken a stake in the first Flemish PPP road deal to close. It owns 49% of the Via-Zaventum joint venture, the SPV on the Eu60 million upgrade of the roads around Zaventem airport, with Fortis.

“It is quite common in Belgium for local authorities to take a stake in a project,” one local investor comments. “While the investment is made through a different entity from the entity in the contract, it is clear they like to be involved. Not all sponsors are keen on this as most PPPs rely totally on private sector sponsors, but the culture is that public bodies want to invest and participate.”

Most of the other PPPs, bar the Flemish schools, have been developed by wholly-private vehicles. Even so, the possibility is that Via-Invest could take a stake in the planned Eu350 million A11 Zeebrugge and the North-South link near Hasselt. While supporters highlight the proactive involvement of the authorities, the structure does not always sit well with sponsors because they often prefer autonomy, and because having a public body as sponsor and grantor creates huge conflicts of interest. As such, these joint ventures remain somewhat untested.

Legislation

Belgium is a country without bespoke legislation covering PPPs. Projects are structured in accordance with the law governing traditional public procurement, which some be­lieve is obsolete or inappropriate. There are claims that this lack of a framework creates too much uncertainty, com­plexity and inefficiencies, including higher negotiation costs.

“Many of the investment decisions are of regional com­petence, and there is some investment vision in Flanders but the thing is that the Law on Public Procurement is of Federal competence, and sensitivity to PPP structures, is unfortunate­ly still not strong enough at the federal level,” Theys observes.

In February, KPMG added to the debate by claiming the tax issues surrounding PPP compounded the challenges involving administrative and private law. The report noted that because no clear tax rules have been implemented on a regional or federal level, authorities are applying their own tax system for each component of the PPP project – design and construction, financing and maintenance.

“It would be more efficient if the tax administration drew up a number of general principles regarding PPPs, instead of having to issue an individual ruling for each project,” the report noted. “Now that not only foreign banks but other private partners, such as pension funds, are also targeting the Belgian PPP market, we suggest that the creation of a favourable climate for PPPs should be at the top of the agenda of Belgian policymakers.”

Participants believe that while there is no specific PPP legislation it only tends to be an issue for non-Belgian com­panies. The fact that most PPP projects have been financed, including big complicated ones, like Liefkenshoek and Flemish schools, shows that investors are comfortable with the current system. Still, Benelux institutions more familiar with the structures have been the mainstay of the financing market.

As such, Leunen does not believe that Belgium actually needs bespoke PPP legislation, pointing to the closed deals as proof that the existing system works fine. “I think none of the projects until now has been affected by the absence of bespoke legislation,” he concludes.

Political instability

The biggest concern for the future of PPPs comes from the lawmakers themselves. Belgium was plunged into a fresh period of political uncertainty – an era it has yet to emerge from – following last June’s general election. The separatist New Flemish Alliance gained the most votes, but failure to negotiate a coalition has left the country without an established government for over nine months and reignited arguments over whether the country should be divided.

The caretaker Belgian government is also looking at slashing up to Eu16 billion of expenditure. It is not clear whether infrastructure projects will be affected or, indeed, if a new government can be formed to create some stability. “I am not completely confident about the future of PPPs in Belgium,” Witteveen says. “The biggest issue is political, as the market does not know what the government will do in terms of infrastructure investment and whether PPPs will be deployed. At the moment, the pipeline is full but I am not sure that will be the case in a year’s time.”

Whether the public authorities will want to continue with a proactive strategy once budgets have been slashed will only become apparent once the governmental turmoil has eased. Even so, the anticipation is that – despite the political problems – at least the existing portfolio of PPPs could be delivered. Theys believes that the political situation will not affect matters in the short-term, in the sense that it can “only affect the projects tendered by the Federal government” as the regional governments still have the power to launch new projects. It is harder to predict the next stage beyond the current PPP portfolio.

“The ongoing Federal projects may still continue under the previous and still valid mandates given by the previous government,” he continues, “But in the longer run, the new Federal projects, or the granting of the ongoing deals, may be delayed as long as there is no new government.”

Leunen believes that the driving force for the future could be on the local level. “One should not forget that the regional and community governments that are responsible for road, port, school and social infrastructure are still in operation and pursuing infrastructure investment plans with an impressive pace.” Beyond the current generation of projects, the future could be less Belgian PPP – and more Flemish PPP.