Belgium’s Flemish Schools PPP project successfully combined both innovative procurement and financing structures while overcoming multiple challenges that were inherent in the project due to its sheer scale and complexity.

Launching a scheme for the design and financing of not one but more than 200 schools is not an easy task for any PPP market – no matter how mature it maybe.

Even though the project spanned a total of four years from tender to financial close, the creative mechanisms employed by the Belgium authorities reduced the chance of default and increased efficiency during every stage of the procurement.

For a relatively small market like Belgium, the project is also a landmark in leading to successful financial close of the €1.5 billion deal during the financial crisis and reintroducing a formal underwriting process in the European PPP market.

Even with a small kitty of PPP projects, the Flemish government has established itself as one of the more innovative PPP grantors in Europe in recent years. For both the Liefkenshoek Rail Tunnel [Transactions Database] and Brabo Tram [Transactions Database] transport PPP deals, the government provided a refinancing guarantee to calm bank fears over the cost of long-term funding.

Similarly, for the Flemish Schools PPP which included 211 primary schools, the government provided a suite of guarantees – including a refinancing guarantee [Transactions Database]. In addition, the government was able to avoid the high bid costs of multiple small PPP projects while maintaining competition between medium and small-sized contractors as well as conduct a large PPP tender for financial sponsors.

Background and Project Specifics

The Flemish Ministry of Education brought the scheme into the market in 2006 as a response to the long standing ten-year waiting list that schools were part of in order to obtain budgets for traditionally procured school infrastructure in Flanders.

The government drew up a tender for the DBFM of a total of 211 schools in Flanders for a period door to door of 36.5 years (6.5 years construction + 30 years operation).

A special purpose vehicle, dubbed the Scholen van Morgen (Schools for Tomorrow) was created for the purpose. The SPV is a 50:50 joint venture between AGIOn - the organising body for school infrastructure within Flanders - and PMV. PMV is another public sector organisation that was set up to finance infrastructure within Belgium and has a remit to invest in social infrastructure. AGIOn joined forces with PMV to channel the public sector investment into the SPV.

The idea behind this was to look for financial institutions to provide the JV with 75 per cent of the equity and all senior debt for the scheme. The chosen private sector partner then becomes the major shareholder of the JV, which will be responsible for the programme carrying both the building and the availability risk on the projects for the 30-year concession period.

Four consortia were shortlisted for the project before BNP Paribas Fortis Bank and Fortis Real Estate was chosen preferred bidder on the scheme in 2008. They were:

• KBC and Dexia
• BNP Paribas Fortis Bank and Fortis Real Estate
• Cofinimmo and Holdings Council
• Barclays Private Equity, NIBC bank and Meridian

The Barclays-led consortium was in second place and waiting in the wings should anything have gone wrong with the preferred bidder.

One of the biggest challenges faced by the government was keeping tender costs under control by not tendering each school as a separate contract, since it had 211 schools to deal with.

Pieter Puelinckx, who was leading the legal counsel team on the project from Linklaters, says: “The schools under the program were put into bundles and each bundle included five schools. Each bundle then was tendered out for competition for architects."

This approach guaranteed competition among construction companies on individual projects, but allowed the government to tender the project out once.

To maintain time pressure on the sponsor, financing for construction of the schools is only in place for six years, so Fortis Real Estate is under a strict deadline not only to get the projects underway but also to have them constructed.

Once the schools are operational, the Scholen van Morgen SPV will receive availability fees from the IM. In its turn, the IM will receive a subsidy for this fee from AGIOn:

• 100 per cent for community schools
• 70 per cent for subsidised primary schools
• 60 per cent for all others

Financing Structure

Funding for the project was unique as it was split into a construction phase (6.5-7 years) and operation phase lending. The shorter-term lending proved to be attractive for banks which were used to more long-term funding in PPP deals.

The construction of schools is funded with equity, revenues generated during the construction period and a revolving construction facility which is refinanced at completion of each school by drawing on the term loan, guaranteed by the Flemish Community.

Five financial institutions acted as underwriters on a €700 million revolving credit facility that matures at the end of the construction phase.

They held final tickets of around €85 million each:

• AG Insurance
• BNP Paribas Fortis
• Dexia Group
• KBC Bank
• SMBC

BNP Paribas Fortis also acted as the sole underwriter for the entire €1.5 billion (US$2bn) term loan which was backed by a government guarantee and will refinance the entire debt at the end of the construction phase.

The six-year revolving credit facility was priced at Euribor +300bp and to be drawn down in favour of the state guaranteed long-term debt facility at 75bp.

Equity amounted to €160 million was split between the following:

• BNP Paribas Fortis - 37.5 per cent
• Fortis Real Estate - 37.5 per cent
• The authority - 25 per cent (plus one share)

The €160 million slug of equity was divided into a €100 million equity and subordinated debt tranche and €60 million contingency support.

Even though the last stages of financing went through some delays because of a pending government decision regarding a decree before the syndication could be completed, the syndication was well subscribed. 

Recalling that stage, Travis Maurer of SMBC says: “In the beginning everyone was a bit nervous because of the scale and complexity of the deal, but it had good fundamentals and was priced well with a short tenor.”

"The syndication was very attractive and the fact that it was well subscribed by 2.5 times, shows the market's appetite for a well structured deal.”

Conclusion

The project is both ambitious and visionary and will put to test the Belgian government’s efficiency in the delivery of the project in the coming years.

While most PPP infrastructure projects in Belgium have so far been structured as DBFM (design, build, finance, maintain) contracts, the government initiative led it to design a relatively new PPP model, whereby DBM and F competitions were separated (DBM + F).

While it may not have led to a slew of pipeline projects in the country, the project definitely has the potential to pave the way ahead for procurement of other large-scale transactions within social infrastructure. The innovative procurement and financial facets of the scheme can help wider acceptance of the PPP model across Benelux.  

The project is also a beacon for the education sector in particular - which has faced hard times elsewhere in the light of public sector cuts and overall government budget constriction.

Project at a glance