With Hungary's hasty re-nationalisations of the last decade and political disputes, its road privatisation programme finally seems to have come of age.

The Hungarian government's initial attempts to procure highways through project finance were marred by disputes over real tolling -the M1-M15 which was renationalised in 1999 and the M5 which was restructured to remove tolls in 2004.

However the government learned from these mistakes to tender the M6 deal in January 2004 on a simple availability-based payment mechanism.

The eastern European country's roads sector has attracted the most attention in the last period with government targets in place to increase the motorway network from 650km to 2500km by 2015.

A lot of investment is required to achieve such a target and most of this is expected to come from private finance.

The most important PPP road project in Hungary at the moment is the M6 motorway which comprises a section of the TENS V/c Helsinki corridor that connects southern and eastern Europe.

The 252km M6 motorway comprised of three phases, the latest to reach financial close was the M6 Phase II, a 60km section from Dunaújváros to Szekszárd.

M6 Phases

The M6 motorway is a north-south motorway in Hungary connecting Budapest to Pécs and Croatia running along the Danube.

Phase I

The M6 was tendered as 22-year DBFO of a 58km two-lane motorway stretching south from Budapest to the M8 motorway at Dunaújváros in 2004. Instead of bearing commercial risk, the consortium would secure a performance based payment of around €55 million per year.

After a competitive tender, the M6 concession was won by M6 Duna Autopalya Koncesszios - a consortium of Bilfinger Berger, Porr and Swietelsky - and reached financial close within a year of the tender in December 2004.

The deal was financed by a €411 million syndicated loan provided by:

• BayernLB
• Commerzbank
• KBC
• KfW
• K&H
• Magyar Kulkereshedelmi Bank

On 11 June, 2006 its first 54 km section between the M0 and Dunaújváros was opened to the public.

Phase III

As with Phase I, the Hungarian government released a tender in the same year (April). The motorway is 78km in length, including some 40km of the M6 highway between Szekszard and Boly in the south of the country as well 30km of the M60 between Boly and Pecs.

The Strabag-led Mecsek Motorway Consortium was selected as the preferred bidder in November after it submitted the lowest bid of €106 million for the 25-year concession.

The Mecsek Motorway Consortium comprises:

• Strabag
• Bouyges Traveaux Publics
• Colas
• RTP
• John Laing Infrastructure
• Intertoll Europe Zrt

The consortium reached financial close in the same month as the preferred bidder selection.

The MLAs were:

• Bank of Scotland
• CIB - part of the Intesa Group
• Fortis
• HSBC
• KfW

Hungarian national bank MFB was also involved in the financing of the €950 million project but not on the MLA table.

Phase II

The most recent section of road to reach financial close was Phase II, completed after Phase III.

The Hungarian government selected a Bilfinger Berger-led team as preferred bidder for Hungary's M6 phase II from Dunaújváros to Szekszárd in June this year.

The Bilfinger Berger team includes Porr and Egis Projects with Deutsche Bank acting as its financial adviser. It went from preferred bidder to financial close in four weeks for the 30-year concession.

The rival bidders also competing for the contract were:

• John Laing, Strabag and Colas
• Macquarie and Mota Engil

Although the transaction was derived from the previous deals, the project documentation had been significantly clarified by the State in the most recent deal from the documentation in the second deal, which proved unpopular in the market.

However the current state of the credit market did require a club deal with ten banks, which meant that dealing with unexpected issues, such as a late procurement challenge, involved the agreement of a greater number of credit committees to agree solutions.

Financing

The €520 million project reached financial close on 18 July with 10 banks providing the €444.70 million term loan tranche, they are:

• BayernLB - €38.42 million
• Caja Madrid - €40.33 million
• Commerzbank - €24.95 million
• DekaBank -  €72 million
• Depfa Bank - €59.72 million
• DZ Bank - €33.58 million
• Erste Bank - €59.54 million
• MKB Bank - €19.21 million
• Raiffeisen - €24.95 million
• SMBC - €72 million

Pricing for the term loan tranche is 100-110bp,

The total equity amount it €57.30 million and senior debt is €462.70 million. The sponsors share in the consortium is:

• Bilfinger Berger - 45 per cent
• Porr - 45 per cent
• Egis - 10 per cent

The debt:equity ratio is 89:11 and there is also a debt service reserve facility tranche of €18 million. The 10 banks have split this amount between them as follows:

• BayernLB - €1.56 million
• Caja Madrid - €1.63 million
• Commerzbank - €1.01 million
• DekaBank -  €2.91 million
• Depfa Bank - €2.42 million
• DZ Bank - €1.36 million
• Erste Bank - €2.41 million
• MKB Bank - €0.78 million
• Raiffeisen - €1.01million
• SMBC - €2.91 million

Freshfields is acting as legal adviser to the sponsors with Deutsche Bank acting as financial adviser.

Local firm Hajdü Pazsitka is acting as legal adviser to the government with ING Bank acting as financial adviser.

Linklaters is providing legal counsel to the banks with Mott MacDonald providing technical advice.

Conclusion

EU funds cover only 10 per cent of the €10.66 billion needed for the development of Hungary's 30,000km of public roads until 2013.

A large proportion of the country's public roads have a lifespan of just 16 years, having been built in the 1970s. Currently, available funds will be sufficient to cover improvement of 200-300km of roads in 2008, highlighting the need for private investment.

The speedy signing of the last two phases of the M6 highlights Hungary's ambitious plans to push through a number of infrastructure deals before 2010.

It took all three projects less than 11 months to implement, arguably a record for a full PPP tender process.  The timely manner in which these projects is down to a decisive and commercially minded grantor, which is critical to the process and this lesson is valid anywhere that PPPs are being implemented.

With M6 now closed, Hungary confirms its reputation as one of the most successful in the CEE region and amongst the EU accession countries at implementing PPPs.

The project at a glance