Public finance, private promoters

By Andreas Campoma

The outcome of recent national elections and changes to legislation in a number of CEE states bode well for PPP development in the region. But is that enough to deliver a worthwhile deal-flow and if so, where will it come from?

Despite a number of high profile and successful transactions, the public-private-partnership (PPP) market in central and Eastern Europe (CEE) has tended to disappoint. Sporadic deal flow, occasioned by a lack of political will and resources, has led funders and sponsors alike to cast a jaundiced eye over certain countries.

However, a host of elections across the region last year may provide the PPP market with the impetus it so badly needs.

For those governments starting a new term in power the reality is stark. In order to function successfully in an expanded Europe, these accession states will be under severe pressure to deliver infrastructure. Sooner or later – and whether they agree with PPPs in principle or not – most governments in the region will need to assess the marked lack of headroom in their borrowing requirements and will have no choice but to turn to PPP structures.

In addition, each accession state must comply with the EU’s Stability and Growth Pact, which mandates the surveillance of fiscal positions and excessive deficits. The basic tenets that accession states must adhere to include an annual budget deficit no higher than three percent and public debt lower than 60 percent of GDP. For many of the accession states, PPPs could be the right solution to tempering public spending.

According to Peter Koves, partner at Clifford Chance in Budapest: “The key to PPPs – not just in Hungary but in the region – is how state budgets will be reorganised. The deals where PPPs are used should be revisited, even though there are not a lot of deals done on a simple availability fee basis.”

Hungary and the Czech Republic look to be doing just that, and in the process are leading the way for jurisdictions with smaller deal pipelines like Serbia: the republic is currently in market with a €300 million build-operate-transfer (BOT) project for its Horgos-Pozega corridor highway. The 30-year term project is in the process of prequalification. Although details are sketchy, it is rumoured that a consortium including FCC and a Strabag-led group are the frontrunners.

With Poland still holding out on PPPs – despite having the largest potential deal flow in the region – and smaller jurisdictions not providing enough in the way of sizeable projects, funders and sponsors will be looking at how many deals they can squeeze out of Hungary and the Czech Republic.

D3 or bust?
Since 2003, when the Czech government pulled out of what would have been the country’s first privately financed shadow toll road, international funders have remained sceptical about initiating any projects in the country. The €1.5 billion deal, which was split into two halves of €850 million each, had been awarded to a consortium led by the Israeli Housing and Construction Association without having gone through the standard tendering process. Allegations of impropriety ensued, together with the speculation about value for money that a certain type of deal continues to attract. Though the government may have stuck to its principles, the goodwill of the international funding community went the same way as the deal.

Finally, after three years and a change of attitude, the Czech Republic seems to be getting its PPP act together. On 5 April 2006, President Vàclav Klaus signed the Concession and Public Procurement Acts, which had both been adopted by the Senate the previous month.

The Public Procurement Act is designed to fulfil the tenets of equality, non-discrimination and transparency. According to the Act, public contracts are divided into three categories: those above a certain threshold, those below the threshold as well as smaller scale public contracts. The larger contracts will need to be reported in OJEU/OJEC, while those below the threshold need only be published in the country. Shorter time frames and a simplified qualification process will be applied to those projects below the threshold.

Contracts exceeding CZK500 million (€8.5 million) will be approved by the central government, while contracts over the CZK250 million mark will be approved by the regional authority in question or the Prague authority. Minimum concession values have also been increased from CZK2 million to CZK20 million, the threshold below which long-term concessions are not economically viable

While the political goodwill behind the legislation may signal a new dawn for PPPs in the republic, others believe that it is more of a last-chance saloon.

“The new D3 project really is the last chance for the Czech Republic to get it right. There was a lot of noise surrounding the D47 deal. If you speak to sponsors and funders, they don’t take kindly to jurisdictions where deals have a tendency to screw up,” says one regional expert.

Others take a more sanguine attitude to the long-term prospects of PPP in the country. According to Alexander Auboeck, business group director infrastructure at the European Bank for Reconstruction and Development (EBRD): “We have helped make amendments to the concession law. The government has now selected a few pilot projects. We trust these projects will be implemented professionally. There can be unrealistic expectations as to how quickly these deals can be done.”

In April last year, the Czech Ministry of Transport announced the tender for the role of principal PPP adviser and project manager for the D3 motorway project. The four-lane 30km section – from Tabor to Bosilec – is to be structured as a design-build-finance-maintain (DBFM) project. Investment costs are in the region of €370 million for the 30-year concession.

The planned total length of the motorway is 171 km, of which an eight km stretch is already in full use, 18 km is in limited use and 145 km is being prepared for construction. If the initial D3 closes successfully, other sections of the motorway will be structured as DBFMs.

Pilot deals
Other smaller pilot deals have come to market. The most high profile of these is the invitation to tender for the OBC stage of the design-build-finance-operate (DBFO) Ponava sports-leisure centre project in Brno. According to PPP Centrum – the joint stock company which reports to the Ministry of Finance – the contract covers “strategic analysis of needs and scope definition for sports-leisure centre in relation to providing football stadium and other infrastructure” and “OBC for brownfield regeneration of Ponava as PPP project”. The 315-hectare project is expected to come in at €67 million, structured as a combination of availability payment and fees collected from users.

In early February 2006, the Czech government also announced the advisory tender for the first PPP healthcare project. The Na Homolce Hospital in Prague comprises a DBFO concession for a new building providing extension of health service operation capacity and a new car parking facility, together with the construction and maintenance of a seven-floor building. The project is estimated to be in the region of €21 million. Further similar-sized projects can be expected to come on line [Na Homolce Hospital closed successfully].

According to Stefan Eder, partner at DLA Weiss-Tessbach in Vienna: “The number of PPP projects in CEE will further increase, although we will see a shift from bigger to mid-sized and smaller projects with a focus on various sectors, including housing and healthcare.”

Nevertheless, it will continue to be the big-ticket projects that capture the imagination of international sponsors and funders.

The largest project expected to hit the market in the next twelve months is the AirCon (Airport Connection) project, which comprises an upgrade of the Prague-Kladno railway line and construction of a railway connection to Ruzyne Airport. The project will be structured as either a BOT or DBFO, with a 30- to 40-year licence contract for operation of traffic, with demand risk shared with the Procuring Public Authority. Some 10 percent in participation costs will be picked up by the government. The total investment for the project is believed to be in the region of CZK15-18 billion (€465-560 million).

According to PPP Centrum, the project is still at an early stage of preparation. The tender preparation will take up much of this year.

Hungary for more
Although Hungary has the most mature PPP market in the region, it has historically been ambivalent. In 2005, the activities of the PPP secretariat were suspended, which left the property management company of the ministry of economy and transport to carry on certain PPP projects. Moreover, before the April elections, when the incumbent socialist party was returned to office, the opposition party, Fidesz, stated that it would keep healthcare and transport projects in state hands.

In late March 2006, however, Hungary closed one of the most significant deals in the region. The M6 Duna Autopalya Koncesszios Zartor en M kod Reszvenytarsasag (M6 Duna motorway concession) refinancing – the region’s first wrapped infrastructure bond issue – looks to have halved the original cost of borrowing for the motorway’s sponsors.

Dexia acted as sole bookrunner and lead manager on the €212 million FSA-wrapped floating rate. The €412 million refinancing came in at less than 50bp over Euribor, compared with 115bp-124bp margins on the original financing.

On the back of the highly successful bond refinancing, all eyes are now on Hungary’s latest bond issue for State Motorway Management Co. Ltd. (ÁAK). The deal – which was mandated to Citigroup and Deutsche in June 2005 – was expected to come in at some €3 billion, but had to be scaled back after Eurostat ruled that the deal could not be taken off balance sheet.

According to Eder: “The Eurostat review for projects will lead to discussions with respect to some of the projects in CEE and their respective classification as non state guaranteed might have to be reviewed.” The restructured deal is now a €1.18 billion issue which will fund new infrastructure projects as well as those projects that were not 50 percent complete by the end of 2005.

More transportation PPPs are expected to come to market in the next 12 months, though this time for rail projects. Ferihegy International Airport will reach capacity in the near future, and the existing rail network needs to be developed.

If an airport connection deal does close successfully, some experts believe it could open the door for PPPs to be used for a host of local rail projects. Others are not optimistic, since most rail companies are running at a loss, especially for passenger transport. Even so, the very fact that PPP is under consideration is an improvement for bankers that have long waited for the region to take off – their patience may yet be rewarded.

Alexander Auboeck: “There can be unrealistic expectations as to how quickly these deals can be done.”