Hungary’s M5 motorway project is a pioneering project in the central Europe region. It is the first genuine road PPP transaction to close in the region and beat neighbouring countries off the mark to draw in foreign investment to its roads infrastructure, writes Angus Leslie Melville.

The financing was put in place to pay off the existing project debt, provide a payment to equity and fund the construction of a new, 46km stretch of motorway linking Budapest to the Serbian border.

Indeed, the deal was so impressive that it was nominated as one of the top 10 transactions of 2004 at the Infrastructure Journal Annual Awards 2004, held on 20 January at the Victoria & Albert Museum, London.

The project was popular with the banks from its inception as it forms a vital link in the Trans-European motorway network linking Berlin with Thessaloniki and was seen as a sound investment.

In short, the project was set up to refinance Phase 1 of the M5 motorway and finance Phase 2. The first phase was finished in 1998 and operated as a real toll road up to March 2004 when Hungary incorporated the motorway into the national vignette system.

The existing project financing was refinanced and switched from a toll-based financing structure to a structure based on availability payments by the Hungarian government.

The deal took many industry observers by surprise as it was structured in less than six months and it involved converting a real toll road into an availability road – a first in the project finance world.

Hungary is seen as being pivotal to European efforts to develop an integrated transport system. Success in Hungary is key as it has six essential international roads pass through it – each one representing a major channel of trade economy and communication.

The Hungarian government has been forward-thinking over its role in Europe and had the wisdom to see how it could benefit from being seen as a vital link in the Trans-European Network.

It set forth its objectives back in 2003 for the road sector within the framework of its general transport policy until 2015 – by which time it aims to have reached the EU network density average.

In order to achieve these objectives, the government legislated to enable the use of PPPs in its road building and maintenance regime. Prior to its acceptance of the PPP structure, Hungary favoured wholly-privatised concessions.

As Hungarian transport minister Istvan Csillag says of the M5 project: ‘This is a truly ground-breaking transaction, the first of its kind in Hungary – and the professional advisors have contributed significantly to the success of the project.

‘I am convinced that the success of the M5 will give a boost to the smooth implementation of the M6 motorway currently taking place as well as underlining the importance of the PPP structure in the rapid development of infrastructure sector in Hungary and the whole CEE region.’

Transaction

The M5 motorway was originally financed, built and operated on a private basis, but the government decided to scrap the real toll system at the start of the year and replace it with an availability-dependent PPP deal.

The change to the model means that the government now has to pay AKA an annual unitary charge of €80m until the end of the concession in 2030 – which covers national vignette holders using the road and compensates for the loss of real toll revenues.

In addition, the government – through its highway management company AKA – has taken a 40 per cent stake in the concession company, with Bouygues and Strabag still holding equal shares of the scheme and control of the project.

The financing was also fairly complicated as the lead arrangers – having refinanced the real toll road at the end of 2003 for €205m – on 11 March 2004 had to buy back the €205m refinancing from seven syndicate banks when the real toll system was scraped. They then held it themselves with the debt being serviced via the availability dependent deal to AKA. This debt was taken out as part of the €750m refinancing.

The second phase closed on 22 September 2004 and involved raising €750m (US$m) Phase 2 financing and implementation of an availability-based payment and performance mechanism for the project.